Law Memo - 1. If Shuebke's review was conducted in good...

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1. If Shuebke’s review was conducted in good faith and conformed to generally accepted accounting principles, could Superior hold Shuebke Delgado liable for negligently failing to detect material omissions in Chase’s audit? Why or why not? This is a matter of accountant liability, negligence – or failing to detect material omissions, and the treatment of accountants acting in good faith and following the generally accepted accounting principles. The basic question is whether or not Shuebke can be held liable assuming she had acted in good faith and conformed to the generally accepted accounting principles. To begin, generally accepted accounting principles can be defined as the conventions, rules, and procedures used to delineate what the acceptable accounting principles are at a specific time. They also outline the level of skill expected of accountants and the degree of care that they should exercise in performing their services. These principles are defined by the Financial Accounting Standards Board (FASB). In determining whether or not Shuebke will be liable if acting under good faith, the Securities Exchange Act of 1934 should first be examined. Under the act, an accountant is alleviated from liability if the accountant acted in “good faith” – the total absence of any intention on the part of the accountant to seek an unfair advantage over, or to defraud, another party(1). However, in order for an accountant to use the good faith defense, they must prove that they had acted in good faith. This can be done through demonstrating that the accountant had no knowledge that the information was false or misleading, also known as a lack of scienter. Another specific act to look into would be the Securities Act of 1933, specifically Section 11, which states that a civil liability can be imposed on accountants for omissions and misstatements, but also requires accountants to use due diligence. “To avoid liability, the accountant must show that he or she had, 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 amaterial fact required to be stated therein or necessary to make the statements therein not misleading. Further, the failure to follow GAAP and GAAS is also proof of a lack of due diligence” (2). In general, in order for a professional (including accountants) to be liable, under the common law, there must be a breach of contract, negligence, or fraud. In order for a professional to be liable for negligence, certain criteria must be met. A duty of care needed to exist, that duty was breached, the plaintiff suffered an injury, and the injury was proximately caused by the defendant’s breach of the duty of care. Particularly for accountants, evidence of negligence will be considered prima facie if there was a violation of GAAP. In regards to Shuebke, as long as she acted in good faith and conformed to the generally
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Law Memo - 1. If Shuebke's review was conducted in good...

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