Which of the following statements is true of accountants' liability to clients in fraud cases?
A) Actual fraud occurs when an accountant acts with "reckless disregard" for the truth or consequences of his or her actions.
B) If an auditor does not verify information from third parties, constructive fraud is said to have been committed by the auditor.
C) Punitive damages may be awarded in cases of actual fraud.
D) The client can only recover nominal damages in cases of constructive fraud.

Question

Quizplus · Accepted Answer

Punitive damages may be awarded in cases of actual fraud, which is when an accountant intentionally or knowingly misrepresents information. This provides an additional form of punishment and deterrence beyond compensatory damages. Constructive fraud, which occurs when an accountant fails to perform due diligence, may still result in compensatory damages for the client, but not punitive damages. Option A is incorrect as "reckless disregard" is a criterion for gross negligence rather than actual fraud. Option B is incorrect as constructive fraud does not require verification from third parties, but rather a failure to exercise reasonable care in the performance of the accountant's duties. Option D is incorrect as constructive fraud may result in significant damages beyond just nominal ones.

Which of the Following Statements Is True of Accountants' Liability