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22 Cards in this Set
- Front
- Back
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Professionals’ liability to Clients
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Breach of Contract
Negligence/Malpractice Liability for Fraud |
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Liability for Negligence
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-Duty of Care
-Breach of Duty -Plaintiff suffered an injury -Breach of Duty was the cause of the injury |
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Liability for Fraud (Actual Fraud)
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-Misrepresentation of a material fact.
-Intent to deceive (scienter). -Justifiable reliance on misrepresentation. -For damages, the innocent party must also prove the amount of injury. |
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Constructive Fraud
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may be found even where intent to deceive is missing if an accountant is grossly negligent in performing his/her duties (with a reckless disregard of the consequences).
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Limiting Professionals’ Liability
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-Appropriate Disclaimers
- Forms of Business Organizations -Professional Liability Insurance -engagement letter -due diliegence (act with stardard of care) |
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Most restrictive (and thus best for Accountants):
“A cause of action based on negligence could not be maintained by a third party who is not in contractual privity.” |
Ultramares Rule
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This is the rule in a majority of states today!
“Accountants should be liable to [actually] foreseen users, or a limited class of users whose use is [actually] forseen. |
Restatement Rule
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Is the least restrictive (worst for accountants) but only in a few states:
“Accountants should be liable to anyone whose use of their reports or financial statements is reasonably foreseeable.” |
Reasonably Foreseeable Users Rule
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another word for contract
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privity
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Defense Against Third Party Lawsuits
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An auditor can defend against such third-party claims by alleging any of the following:
No duty existed (under Ultramares or Restatement Tests); No breach existed (the work was performed in accordance with professional standards); No injury existed (the third party did not suffer any loss); No causation existed (the loss to the third party was caused by something other than the auditor’s negligence); The third party was contributorily negligent; or The statute of limitations has expired. |
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an auditor or underwriter may be liable to a purchaser of securities issued pursuant to a defective registration statement.
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Section 11
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Under Section 11 of 1933 Act the purchaser need only prove:
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-The security was offered through the registration statement;
-Damages were incurred; and -There was a material misstatement or omission in statement. |
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Due Diligence Defense
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after reasonable investigation, reasonable grounds to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission of a material fact required to be stated therein or necessary to make the statements therein not misleading.
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Defenses Under Section 11
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There were no misstatements or omissions
The misstatements or omissions were not of material facts. The misstatements or omissions had no causal connection to the plaintiff’s loss. The plaintiff-purchaser invested in the securities knowing of the misstatements or omissions. most common defenses is referred to as the “Due Diligence Defense |
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imposes liability on persons who furnish misleading and false statements of material fact in any report or document filed with the SEC under the 1934 Act, such as annual 10-K report, monthly 8-K report, and proxy statements.
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Section 18 of the 1934 Securities Exchange Act
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Unlike Section 11 of the 1933 Act, a purchaser or seller of a security must prove this under Section 18 of the 1934 Securities Exchange Act
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That there was a false or misleading statement; and
Reliance by the purchaser or seller on the false or misleading statement. |
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First step in limiting professional’s liability.
Developed to clarify the responsibilities of accountants and auditors in performing professional services. |
Engagement Letter
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prohibit anyone (including accountants) from making misstatements or omissions of material facts in connection with the purchase or sale of any security
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Section 10 and Rule 10b–5
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replaced joint and several liability with “proportionate liability:”
Defendant liable solely for the portion of the damages that correspond to the percentage of responsibility of that defendant. -However, at the same time, this act imposed significant public duties on auditors who audit the financial statements of public companies. -also expanded the auditors obligations to report illegal acts (including financial statement fraud) to: Management Audit Committee or Board of Directors The SEC |
Private Securities Litigation Reform Act
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accountants must keep working papers related to an audit/review for a minimum of how many years?
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7 years
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Right to refuse to testify against client in a court of law.
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Privilege
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Is there generally a accountant-client privilege in federal courts?
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very rare
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