Question 1

Ailing Company's liabilities exceed its assets. Ailing hires Brad, an accountant, to certify a balance sheet showing a positive net worth. Credit Bank relies on the balance sheet to make a loan to Ailing. The firm defaults on the loan. Under the Ultramares rule, Brad is most likely not liable because he​

Accepted Answer

Under the Ultramares rule, an accountant is generally not liable to third parties for negligence unless there is privity of contract or a relationship akin to privity. Since Brad was not in privity with the bank, he is most likely not liable.

Question 2

April is an accountant whose clients include Bistro Restaurants Inc. If April is negligent in her work for Bistro, most courts would hold her liable to Bistro and​

Accepted Answer

Most courts would hold April liable to third parties who are foreseen users of her work, as they are intended beneficiaries of the accountant's services.

Question 3

Farley, an accountant, intentionally misstates a material fact to mislead Global Industries, Inc., a client. Global justifiably relies on the misstatement to its detriment. Farley is most likely liable for​

Accepted Answer

Farley intentionally made a misstatement to mislead his client, which can be considered as fraud. Additionally, Global Industries, Inc. justifiably relied on the misstatement and suffered a loss as a result. Therefore, Farley can be held liable for fraud.

Question 4

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove​

Accepted Answer

Constructive fraud does not require proof of intent to deceive, only proof of actions or omissions that result in a breach of duty and cause harm to the plaintiff.

Question 5

Hadley, an accountant, accumulates working papers while performing an audit for Ilene. After the audit, these documents belong to​

Accepted Answer

The working papers created by an accountant during an audit are the property of the accountant, but the client has a right to access them.

Question 6

Doug, an accountant, prepares for Econo Enterprise, Inc., a financial statement that omits a material fact. The statement is included in Econo's registration statement with the Securities and Exchange Commission. Felicia, who relies the statement, and Graham, who does not, each buy Econo stock. Under Section 11 of the Securities Act of 1933, Doug may be liable to​

Accepted Answer

Section 11 of the Securities Act of 1933 imposes liability on any person who prepares or certifies a registration statement that includes an untrue statement of a material fact or omits a material fact. In this case, Doug, the accountant, prepared a financial statement that omitted a material fact, which was included in Econo's registration statement. Felicia and Graham, who bought Econo stock, relied on this statement. Therefore, both Felicia and Graham may hold Doug liable under Section 11.

Question 7

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for​

Accepted Answer

Actual fraud involves intentional misrepresentation of facts with the intent to deceive another party and causing damages to the victim, which is what Ezra did to Fruit Packing, Inc. This is different from constructive fraud, which involves a breach of duty or failure to disclose information and can occur without an intent to deceive. Destructive fraud and virtual fraud are not recognized legal terms.

Question 8

Taylor is an accountant whose clients include Universal Metrics Corporation. Vera is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by​

Accepted Answer

The working papers developed by an accountant, like Taylor, when preparing financial reports are typically owned by the accountant themselves, not the client or any third party.

Question 9

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards​

Accepted Answer

The violation of generally accepted accounting principles and generally accepted auditing standards is considered prima facie evidence that the accountant was negligent in performing their duties. This means that the burden shifts to the accountant to prove that they were not negligent, rather than the burden being on the plaintiff to prove negligence. Therefore, Norman's violation of these standards may indicate negligence and subject him to liability.

Question 10

Lauren is an attorney. Like the conduct of all attorneys, Lauren's conduct is governed by rules of professional conduct established by the state in which she is licensed, and the Model Rules of Professional Conduct of​

Accepted Answer

The American Bar Association establishes the Model Rules of Professional Conduct for attorneys.

Question 11

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and​

Accepted Answer

The Ultramares rule limits an accountant's liability to only those with whom the accountant has privity or near privity, meaning a direct contractual relationship or a relationship that is similar to a contractual relationship. Therefore, the accountant would not be liable to any third party with whom the accountant does not have privity or near privity.

Question 12

Brenda is an attorney whose clients include Capital Finance Company. If Brenda is negligent in her work for Capital, under the Restatement (Third) of Torts, Brenda may be liable to Capital and​

Accepted Answer

Under the Restatement (Third) of Torts, an attorney like Brenda may be liable to third parties who are foreseen users of the work, meaning those whom the attorney could reasonably expect to rely on the work.

Question 13

Tyson accuses Ulman, an attorney, of committing malpractice. Malpractice is​

Accepted Answer

Malpractice is typically defined as professional negligence or the failure to exercise a reasonable degree of skill and care in one's professional duties. In this case, Tyson is accusing Ulman of committing malpractice, indicating that he believes Ulman failed to meet the professional standard of care expected of an attorney.

Question 14

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable​

Accepted Answer

Constructive fraud does not require proof of fraudulent intent, but instead focuses on gross negligence or recklessness in the performance of duties. Therefore, Drake may be held liable if Commerce Bank can prove that he was grossly negligent in his accounting duties.

Question 15

Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou​

Accepted Answer

All attorneys have a duty to act with competence, diligence, and promptness in representing their clients. Allowing a statute of limitations to lapse on a client's claim would likely be considered a breach of this duty and could result in a malpractice claim against the attorney. The other options are not accurate, as violating an ethical standard can still result in liability, there are no criminal penalties for allowing a statute of limitations to lapse, and automatic disbarment is not a common consequence for this type of mistake.

Question 16

Delaney is an accountant charged with negligence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that​

Accepted Answer

If Delaney can prove that the negligence was not the proximate cause of the client's losses, he may successfully defend against the claim. Proximate cause means that the negligence caused the actual harm suffered by the client. If Delaney can show that even if he had not been negligent, the client would have suffered the same losses, he may not be held liable. Options A, B, and D are not relevant defenses in this case.

Question 17

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Root & Branch can also perform​

Accepted Answer

Root & Branch is already performing auditing services for Sales & Service Company, and according to the Sarbanes-Oxley Act, they cannot provide any additional services to maintain their independence and objectivity. Bookkeeping, appraisal services, and financial systems design are examples of such services that are prohibited under this act. Hence, the best choice is B, none of the choices.

Question 18

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​

Accepted Answer

Defalcation refers specifically to embezzlement, which is the act of stealing money or property entrusted to one's care.

Question 19

Gift Company's liabilities exceed its assets. Gift hires Hill & Dale, an accounting firm, to prepare a balance sheet. Through negligent omissions, the sheet shows a net worth. Invest Bank relies on it to make a loan to Gift. When the firm defaults, the bank files a suit against Hill & Dale. Under the Restatement (Third) of Torts, Hill & Dale is most likely​

Accepted Answer

Under the Restatement (Third) of Torts, an accountant can be liable to third parties if they knew that the third party would rely on their work, such as a balance sheet, and the third party suffers a loss due to negligence.

Question 20

Rollo is an accountant whose clients include Systems Analysis Corporation. Tyra is Rollo's attorney. Under the common law and by statute in many states, working papers that Rollo develops when preparing financial reports for Systems Analysis are owned by​

Accepted Answer

Under common law and by statute in many states, the accountant who prepares the working papers retains ownership of them, so Rollo owns the working papers he develops.

Quiz 47: Professional Liability and Accountability

April is an accountant whose clients include Bistro Restaurants Inc. If April is negligent in her work for Bistro, most courts would hold her liable to Bistro and​

Farley, an accountant, intentionally misstates a material fact to mislead Global Industries, Inc., a client. Global justifiably relies on the misstatement to its detriment. Farley is most likely liable for​

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove​

Hadley, an accountant, accumulates working papers while performing an audit for Ilene. After the audit, these documents belong to​

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for​

Taylor is an accountant whose clients include Universal Metrics Corporation. Vera is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by​

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards​

Lauren is an attorney. Like the conduct of all attorneys, Lauren's conduct is governed by rules of professional conduct established by the state in which she is licensed, and the Model Rules of Professional Conduct of​

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and​

Brenda is an attorney whose clients include Capital Finance Company. If Brenda is negligent in her work for Capital, under the Restatement (Third) of Torts, Brenda may be liable to Capital and​

Tyson accuses Ulman, an attorney, of committing malpractice. Malpractice is​

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable​

Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou​

Delaney is an accountant charged with negligence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that​

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Root & Branch can also perform​

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​

Rollo is an accountant whose clients include Systems Analysis Corporation. Tyra is Rollo's attorney. Under the common law and by statute in many states, working papers that Rollo develops when preparing financial reports for Systems Analysis are owned by​

April is an accountant whose clients include Bistro Restaurants Inc. If April is negligent in her work for Bistro, most courts would hold her liable to Bistro and

Farley, an accountant, intentionally misstates a material fact to mislead Global Industries, Inc., a client. Global justifiably relies on the misstatement to its detriment. Farley is most likely liable for

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove

Hadley, an accountant, accumulates working papers while performing an audit for Ilene. After the audit, these documents belong to

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Taylor is an accountant whose clients include Universal Metrics Corporation. Vera is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards

Lauren is an attorney. Like the conduct of all attorneys, Lauren's conduct is governed by rules of professional conduct established by the state in which she is licensed, and the Model Rules of Professional Conduct of

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and

Brenda is an attorney whose clients include Capital Finance Company. If Brenda is negligent in her work for Capital, under the Restatement (Third) of Torts, Brenda may be liable to Capital and

Tyson accuses Ulman, an attorney, of committing malpractice. Malpractice is

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable

Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou

Delaney is an accountant charged with negligence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Root & Branch can also perform

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is

Rollo is an accountant whose clients include Systems Analysis Corporation. Tyra is Rollo's attorney. Under the common law and by statute in many states, working papers that Rollo develops when preparing financial reports for Systems Analysis are owned by