Accountants Liability

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Accountants Liability
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THE ACCOUNTANT-CLIENT RELATIONSHIP

• Nature of Accounting Services
• Auditing
• Tax Preparation and Advice
• Management Consulting Services

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THE ACCOUNTANT-CLIENT RELATIONSHIP

• Auditing Professional Standards
• Generally Accepted Auditing Standards
• (GAAS)
• Generally Accepted Accounting Principles (GAAP)
  

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THE ACCOUNTANT-CLIENT RELATIONSHIP

• Contractual Nature of the Relationship
• Importance of the Engagement Letter
• Scope of the work to be performed, obligations
  assumed

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THE ACCOUNTANT-CLIENT RELATIONSHIP

• Duty of Confidentiality
• Confidential Communications and Working Papers
• Accountant-client privilege

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COMMON LAW LIABILITY OF ACCOUNTANTS

• Breach of Contract
• Breach of Fiduciary Duty

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COMMON LAW LIABILITY OF ACCOUNTANTS

• Professional Negligence - Malpractice
• Reasonable Accountant Standard
• Importance of Professional Standards, e.g.
  compliance with GAAS

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COMMON LAW LIABILITY OF ACCOUNTANTS

• Negligent Misrepresentation Claim
• One who, in the course of his profession
  supplies false information for the guidance of
  others in their business transactions, is
  subject to liability for loss caused by
  their justifiable reliance upon the information,
  if he fails to exercise reasonable carein
  obtaining or communicating the information.

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COMMON LAW LIABILITY OF ACCOUNTANTS

• Defenses to Liability Contributory Negligence
• Traditional Audit Interference Rule
• Modern Comparative Negligence

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COMMON LAW LIABILITY OF ACCOUNTANTS

• Negligence Liability to Third Parties
• Traditional Privity Rule - Ultramares
• Auditor only liable to client and identified
  third party beneficiary

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LIABILITY TO THIRD PARTIES

• Majority Rule Known or Foreseen Class of
  Users
• Auditor only liable to
• (1) The person or group of persons who he knew
  would be relying on the audit report
• (2) In a transaction for which he knew the report
  would be used

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LIABILITY TO THIRD PARTIES

• Minority Rule Foreseeable Users
• Auditor liable to all reasonably foreseeable
  third party users
• Auditor liable to third parties he or she should
  have known would rely on the audit report

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COMMON LAW LIABILITY OF ACCOUNTANTS

• Fraud Liability
• Actual and constructive fraud
• (gross negligence/recklessness)
• Liability to all reasonably foreseeable third
  parties

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STATUTORY LIABILITY OF ACCOUNTANTS

• Securities Laws
• Tax Laws
• RICO

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Section 11 33 Act

• Basis of Liability
• Material Misstatement or Omission in Certified
  Financial Statements
• Due Diligence Defense
• Reasonable Investigation Reasonable Grounds
  to Believe Statements are Accurate

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Securities Exchange Act of 1934

• Section 18
• Misstatements in the registration filings -
  reliance required
• Good faith defense

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Securities Exchange Act of 1934

• Rule 10B-5
• Hochfelder Scienter Requirement
• Recklessness as Basis of Liability

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34 Act Limits on Liability

• Central Bank
• No aiding and abetting liability under
• 10B-5
• Private Securities Litigation Reform Act
• SEC can bring enforcement actions based on
  aiding and abetting

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34 Act Limits on Liability

• Private Securities Litigation Reform Act
• Procedural Impediments to Class Actions under
  10b-5
• Modified Proportionate Liability System
• New Requirements for Detection and Disclosure
  of Illegal Corporate Acts

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Sarbanes-Oxley (SOX)

• Public Company Accounting Oversight Board (PCAOB)
• New federal agency with authority to regulate
  accounting firms that audit public companies
• PCAOB has power to register firms that audit
  public companies, conduct inspections of and
  discipline registered public accounting firms,
  set auditing standards

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Sarbanes-Oxley (SOX)

• Prohibits accounting firms from providing
  specific non-audit consulting services (e.g.,
  bookkeeping, appraisal services) to clients the
  firm audits
• Strengthens the role of the independent audit
  committee in the selection and compensation of
  audit firms