Deck 43: Accountants Legal Liability

Question 1

Mary tells her accountant, "I must have this year's audit completed by March 1, and time is of the essence." The accountant agrees to complete the audit by March 1.Under general contract law, if the audit is not completed by March 1, Mary does not have to pay the accountant for the audit.

Answer 1

True

Question 2

The Private Securities Litigation Reform Act of 1995 provides that an auditor can be held liable in a private action for any finding, conclusion, or statement expressed in the report the Act requires the auditor to make to the SEC.

Answer 2

False

Question 3

An accountant who substantially performs his contractual duties is generally entitled to be compensated for the contractually agreed-upon fee, less any damages caused to the client.

Answer 3

True

Question 4

An accountant who willfully violates Section 11 of the Securities Act of 1933 is subject to fines of up to $100,000 or imprisonment of not more than three years, or both.

Question 5

An accountant is subject to potential civil liability arising from the professional services he provides to his clients and third parties.

Question 6

The lead audit partner having primary responsibility for an audit and the partner responsible for reviewing the audit must rotate at least every 3 years.

Question 7

Martin agrees to perform an audit within 30 days, knowing that time is of the essence.After the 30 days, Martin has only performed 60% of the audit.Martin has materially breached his contract.

Question 8

Historically, an accountant's liability for negligence extended only to the client and third party beneficiaries.

Question 9

In recent years, accountants have been subject to civil lawsuits based on the Racketeering Influenced and Corrupt Organizations Act.

Question 10

Section 11 of the 1933 Securities Act imposes liability upon an accountant for negligence in the conduct of an audit.

Question 11

An implied agreement in the contractual relationship is the agreement by the accountant to act in a competent and professional manner.

Question 12

Accountants are subject to civil liability under the Securities Act of 1933 if the financial statements they prepare or certify for inclusion in a registration statement contain any untrue statement or omit any material fact, but only if reliance on the financial statements is proven.

Question 13

An accountant is negligent if she does not exercise the degree of care a reasonably competent accountant would exercise under the circumstances.

Question 14

An accountant-client privilege is statutorily recognized in all states, permitting the accountant to refuse to disclose confidential information gleaned from his client.

Question 15

An accountant who willfully violates Section 11 of the 1933 Securities Act is subject only to civil liability.

Question 16

Accountants' liability under the 1933 and 1934 Securities Acts is less extensive and has more limitations than liability under the common law.

Question 17

Under the Securities Exchange Act of 1934, an accountant's liability for false or misleading statements is based on a good faith negligence standard.

Question 18

The Public Company Accounting Oversight Board can impose sanctions in its disciplinary proceedings, including the permanent revocation of an accounting firm's registration, a permanent ban on a person's associating with any registered firm, and civil monetary penalties.

Question 19

Both the common law and federal law recognize an accountant-client privilege.

Question 20

An accountant has no liability to parties other than the client.

Question 21

To whom does an accountant have potential liability?

A) To his client only.
B) To an intended third party beneficiary.
C) To a foreseen user of the accountant's work.
D) All of these.

Question 22

Which of the following is correct with regard to an accountant's contractual liability?

A) An accountant implicitly agrees to perform a contract in a competent and professional manner.
B) An accountant is bound to perform all the duties she explicitly agrees to perform.
C) An accountant who breaches his contract with a client may also be liable to a third party intended beneficiary.
D) All of these are correct.

Question 23

In recent years, more and more courts have followed the Ultramares doctrine in deciding cases.

Question 24

Barbara, a CPA, fails to discover a fairly obvious error in the books of her client, Banana Computers.If Ben relies on Barbara's certification of the financial statement in deciding to accept the position of president of the company, Barbara will:

A) not be liable to Ben unless Ben notified Barbara in advance of his intention to rely on the financials.
B) be liable to Ben only if she has a contract with Ben.
C) not be liable if Ben is not a party to the original contract.
D) in most states be liable to Ben as a third party beneficiary of her contract with Banana.

Question 25

To lessen his tax liability, a client asks his accountant to misstate information on his tax return.If the accountant does so, she may be subject to fines and up to three years in prison.

Question 26

An accountant who contractually promises to conduct an audit to detect possible embezzlement is under a contractual obligation to provide an expanded audit beyond generally accepted auditing standards.

Question 27

Most courts allow an accountant to raise the defense of the plaintiff's contributory or comparative negligence.

Question 28

Anna has a contract to perform accounting services for Intercend Corporation.She breaches her contract in a nonmaterial way.Which of the following is correct with respect to Anna's liability?

A) Anna does not have liability to third party intended beneficiaries.
B) Anna will get full compensation only after she corrects the breach.
C) Anna is not entitled to any compensation for her services.
D) Anna is entitled to the contractually agreed upon fee less any damages or loss her breach has caused her clients.

Question 29

A five-member Public Company Accounting Oversight Board oversees the audit of public companies, and the SEC oversees the Board.

Question 30

In which of the following situations would an accountant be subject to criminal liability?

A) Where the accountant willfully breached a contract.
B) Where the accountant refused to turn over working papers to a client.
C) Where the accountant willfully omitted a material fact on a securities registration statement.
D) Where the accountant negligently performed an audit.

Question 31

The Sarbanes-Oxley Act establishes a new regulatory body to oversee public company auditors, makes auditors more closely connected to their clients, and places direct responsibility for the audit relationship on the auditor himself.

Question 32

An accounting firm may perform both bookkeeping services and audits for the same client.

Question 33

An accountant may not disclose the contents of his working papers under any circumstances.

Question 34

In the Ernst & Ernst v.Hochfelder case, the Supreme Court stated that Section 10(b) of the 1934 Act and SEC Rule 10b-5 apply only to intentional conduct and not to negligence.

Question 35

Protected individuals under the Restatement view of tort liability for an accountant include potential investors and the general public.

Question 36

Audit working papers would include which of the following?

A) Records of accounting and auditing procedures and tests performed.
B) Accountant fees accrued for the year from all accounts.
C) A collection of IRS rulings related to auditing in general.
D) Engagement letters.

Question 37

An accountant is generally held to be the owner of the working papers he uses in performing an audit.

Question 38

Criminal sanctions for accountants are limited to punitive fines.

Question 39

In which of the following types of cases can issues of accountant-client confidentiality arise?

A) Civil litigation.
B) Criminal cases.
C) Tax cases.
D) All of these are situations where it can arise.

Question 40

For an accountant to be civilly liable under Rule 10b-5, the accountant must have acted with scienter.

Question 41

Which of the following can be the basis for an accountant's liability under state law?

A) Contract law and negligence, but not criminal law.
B) Tort law, contract law, and criminal law.
C) Intentional torts and negligence, but not contract law.
D) Negligence, criminal law, and strict liability.

Question 42

Matthew decides to invest in the stock of a television production company after he reads Edgar's audit, which includes a known falsity as to the value of numerous worthless securities held as corporate assets.If Matthew sues Edgar, he will be entitled to:

A) nominal damages only.
B) nothing, in a majority of states, since the class of foreseen users of the audit contract does not include potential investors and the general public.
C) compensatory damages, in a majority of states, if he is a foreseen user of the audit.
D) rescission of his purchase contract.

Question 43

Which of the following is correct with respect to the accountant-client privilege?

A) Some states statutorily recognize such a privilege.
B) Federal law recognizes such a privilege.
C) The common law recognizes such a privilege.
D) All of these are correct.

Question 44

The failure by an accountant to use the care of a reasonably competent accountant under the circumstances is:

A) material breach.
B) negligence.
C) substantial performance.
D) fraud.

Question 45

An accountant's legal responsibility under state law may be based on:

A) criminal law.
B) contract law.
C) tort law.
D) All of these.

Question 46

Sara holds 1,000 shares of stock in Starr, Inc., which she purchased based upon financial statements that Travis had prepared.She now realizes that the statements were false and wants to sue Travis for common law fraud.What is Travis's best defense?

A) Sara lacks privity of contract.
B) Starr contributed to the misstatement.
C) Travis gave a broad disclaimer as part of the financial statement.
D) The false statements were immaterial.

Question 47

When can an accountant release audit working papers?

A) Only w hen a court orders disclosure.
B) At any time at the discretion of the accountant.
C) Either when a client consents or when a court orders disclosure.
D) Only when a client consents.

Question 48

Matty is an employee of ValCom but doe not own any ValCom stock.At her five year employment anniversary, she decides to buy 50 shares of a new issue of company stock as a savings plan and afterward receives the signed registration statement.  Because of her employment at ValCom, she recognizes that the statement contains an untrue material fact.Can she sue the auditor?

A) Yes, under Section 11, proof of reliance is usually not required.
B) Yes, if she can prove she would not have bought the stock otherwise.
C) No, because there is no privity between Matty and the auditor.
D) No, because she did not rely on the statement.

Question 49

An accountant's records, including the data-gathering process followed and the information and conclusions drawn therefrom, are known as:

A) tax returns.
B) working papers.
C) privileged communication.
D) rough drafts.

Question 50

Which of the following could give rise to an accountant's criminal liability?

A) Tampering with accounting records.
B) Falsely completing a tax return.
C) Advising a client to falsely complete his own tax return.
D) All of these could subject an accountant to criminal liability.

Question 51

Pam certified a statement prepared by John, her employee, without checking John's work.He was never known to be anything but diligent and his integrity had never been questioned.The audit contained gross misstatements.Pam defends a suit against her claiming "due diligence." She will:

A) fail, because she is automatically liable for her employee's act.
B) succeed, since she had no reason to believe her employee would lie.
C) succeed, because a reasonable person would have inquired further.
D) fail, because due diligence requires reasonable investigation.

Question 52

The group responsible for registering public accounting firms that prepare audit reports for issuers; overseeing the audit of public companies; establishing audit report standards and rules; and inspecting, investigating, and enforcing compliance on the part of registered public accounting firms is the:

A) Public Company Accounting Oversight Board.
B) SEC.
C) FTC.
D) American Institute of Certified Public Accountants.

Question 53

Edmund, who is auditing the books of Windgrove Co., becomes aware of information indicating an illegal act within the company.Edmund must:

A) resign immediately to avoid criminal liability.
B) notify local law enforcement and remove himself from any association with the company.
C) determine whether an illegal act occurred and, if it did, the possible effect on Windgrove's financial statements.
D) notify the SEC immediately so it can conduct an investigation.

Question 54

An accountant can ethically disclose a client's confidential information if the accountant complies with:

A) a court order.
B) Generally Accepted Auditing Standards requirements.
C) the client's request.
D) All of these.

Question 55

Which of the following is correct with respect to an accountant's working papers?

A) An accountant may not surrender her working papers unless the client consents or a court orders the disclosure.
B) The client is held to be the owner of an accountant's working papers.
C) An accountant must surrender his working papers to his client if the client so requests.
D) All of these are correct.

Question 56

The purposes of the Sarbanes-Oxley Act include all of the following except:

A) establishing a new regulatory board to oversee public company auditors.
B) making auditors more independent from their clients.
C) requiring yearly certification refresher courses for all public company auditors to ensure they are using the latest conventions in accounting.
D) placing direct responsibility for the audit relationship on audit committees .

Question 57

In what situations is the accountant-client privilege recognized?

A) It is only recognized in federal court proceedings.
B) It is recognized in most states by reason of court decisions.
C) It is recognized by virtue of the common law in most states.
D) It is recognized only in those states that have enacted statutes creating such a privilege.

Question 58

Which of the following is untrue regarding the relationship of an accountant and the client?

A) The accountant must act in a competent and professional manner.
B) The accountant is under an ethical obligation not to disclose confidential information.
C) The accountant is under a contractual obligation to follow all of the client's instructions and to use the client's figures without question.
D) It is based upon mutual agreement.

Question 59

What sort of liability does an accountant have under the Securities Exchange Act of 1934?

A) Criminal liability where there is a willful violation.
B) Civil liability where there is scienter.
C) Both of these are correct.
D) Neither of these is correct.

Question 60

Which of the following defenses may be raised by an accountant under Section 11 of the 1933 Securities Act?

A) Privity, but not due diligence.
B) Privity and due diligence.
C) Due diligence, but not privity.
D) Neither privity nor due diligence.

Question 61

List the services that the Sarbanes-Oxley Act prohibits accounting firms from performing for audit clients.

Question 62

Which of the following would NOT constitute scienter?

A) Negligent performance of a substandard audit.
B) Being paid to conceal fraud.
C) Reckless disregard for truth.
D) Actual knowledge of fraud.

Question 63

Taylor, who is conducting an audit of Oakwood Corporation, becomes aware of information that indicates Oakwood was involved in an illegal payment.Discuss Taylor's responsibilities.

Question 64

First Cardinal Bank has used the  StoneCipher accounting firm  for over twenty years.Orville, a customer of First Cardinal, approached Alfred, a StoneCipher partner, at a local business owner's networking luncheon.Orville asked about the bank's financial stability.Although Alfred knew that the bank's stock was overvalued because of some questionable loans, he felt a considerable amount of loyalty to First Cardinal for being a good customer of his accounting firm.Alfred told Orville that StoneCipher had just finished an audit of the bank, and that the bank was as sound as the Rock of Gibraltar.The next day Orville bought 800 shares of First Cardinal .One month later, the bank's losses became the subject of a major financial scandal.Orville is angry and wants to sue.Does he have a case?

Question 65

In providing services for his client, an accountant obtains information concerning the client's business affairs.What are the legal issues concerning this client information?

Question 66

A group of investors brings a class action lawsuit against the Z & R Accounting Firm under Section 10b and Rule 10b-5 of the 1934 Securities Act.Angela, an accountant with the firm, had done an audit of the Pennymart Inc.books.The audit failed to disclose that Orrin, the president of Pennymart, had stolen large amounts of cash from the firm.Pennymart eventually filed for bankruptcy as a result of the thefts.What is the likely result of the suit?

Question 67

Diane prepared a registration for the first issuance of stock of the Ledmar Corporation.Diane took the assignment very seriously and spent a great deal of time preparing the statement.Two years after the statement was filed, the SEC began to investigate the company and claims that the information in Diane's statement was misleading, because some of the information given to her by the corporation was false.Diane had tried to verify the information, but was not able to do so.An investor is now suing Diane claiming that she violated the 1933 act.Is Diane liable?

Question 68

What are the requisite elements of fraud?

Question 69

What is the basis of an accountant's potential criminal liability in rendering professional services?