<a href="/keyword/business-law-today/" >business law today</a> Standard 8th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus Chapte r 35 Liability of Accountants and Other Professionals Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 1 Learning Objectives Under what common law theories may professionals be liable to clients? What are the rules concerning an auditor's liability to third parties? How might an accountant violate federal securities laws? What crimes might an accountant commit under the Internal Revenue Code? What constrains professionals to keep communication with their clients confidential? 2 Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning Potential Common Law Liability to Clients Under the common law, professionals may be liable to clients for: Breach of contract. Negligence. Fraud. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Liability for Breach of Contract If professional breaches (express or implied) the terms of a contract, then the client has the right to recover damages from the professional. Not on time or did not complete work. Professional performed work below standard of care of professional peers. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Liability for Negligence Element to establish negligence: Duty of care existed. Breach of duty. Plaintiff suffered an injury. Breach of duty was the cause of injury. All professionals are subject to standards of conduct established by codes of professional standards and ethics, by state statutes, and by judicial decisions. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Defenses to Negligence Accountant was not negligent. If accountant was negligent, negligence was not the proximate cause of the client's losses. The client was negligent (depending on state law and apportionment of fault). CASE 35.1 Oregon Steel Mills, Inc. v. Coopers v. Lybrand, LLP (2004). Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Professionals' Liability for Fraud Elements to establish fraud: Misrepresentation of a material fact. Intent to deceive. Reliance on misrepresentation. For damages, the innocent party must have been injured. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Auditors' Liability to Third Parties The Ultramares Rule. Accountants should be liable only to those with whom they are in privity or &quot;near privity&quot; of contract. CASE 35.2 Reznor v. J. Artis Management, Inc. (2005). The Restatement of Torts Rule. Accountants should be liable to foreseen, or known, users of their reports or financial statements. Liability to Reasonably Foreseeable Users. Accountants should be liable to those whose use of their reports or financial statements is reasonably foreseeable. 8 Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning Sarbanes-Oxley Act of 2002 Imposes a number of strict requirements on both domestic and foreign public accounting firms that provide services to companies selling securities to the public. Public Company Accounting Oversight Board. Accountability to Public Accounting Firms. Requirements for Maintaining Working Papers. Must maintain for five years after audit. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Potential Statutory Liability of Accountants Liability under the Securities Act of 1933. Liability under Section 11. Liability to Purchasers of Securities. Due Diligence Standard. Defenses. Penalties and Sanctions. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Liability of Accountants Liability under the Securities Exchange Act of 1934 Liability under Section 18. Liability under Section 10(b) and SEC Rule 10b-5. CASE 35.3 Overton v. Todman &amp; Co. , CPA's, P.C. (2007). Private Securities Litigation Reform Act of 1995. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Potential Criminal Liability Securities Act of 1933. Securities Act of 1934. Internal Revenue Code. State and Federal Criminal Codes. Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Confidentiality and Privilege Confidentiality. Professionals are restrained by the ethical tenets of their profession to keep all communications with their clients confidential. Privilege: Right to refuse to testify against client in a court of law. Attorneys. In all state and federal courts. Accountants Only in some states' courts. Not in federal court (IRS!). Copyright 2008 by West Legal Studies in Business A Division of Thomson Learning 13