WP%2004%20Legal%20Liab%20Students - Chapter 4 Legal...

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WP 04 Legal Liab Students 1 Chapter 4 Legal Liability Contract : CPAs enter into contract with their client. Client can always sue CPA for breach of contract (violating terms of the agreement.) Privity : A relation between parties that is held to be sufficiently close and direct to support a legal claim on behalf of or against another person with whom this relation exists. Ordinary negligence —lack of reasonable care. For CPA, lack of following applicable standards. Gross negligence —lack of even minimum care in performing duties. Can result in “constructive fraud” if reckless disregard for duty. With fraud or constructive fraud, privity is not needed to sue. Fraud —Misrepresentation of material facts, with intent to deceive other party. Constructive fraud —No intent to deceive other party. Gross negligence has been interpreted as being constructive fraud. Common law —laws that have been developed through court decisions rather than legislatively. Breach of contract—claim brought by client. Tort Liability— A private wrong against a person or his property, usually arising from intentional, wrongful action, or negligence. Claim brought by third party against the auditor. Joint and several liability – allows successful plaintiff to recover the full amount of a damage award from the defendants who have money or insurance, even if they are only partially liable for the plaintiff’s losses. Comparative negligence or proportionate liability —damages allocated based on degree to which each party is at fault. Plaintiff can sue CPAs under common law, state or federal statutes, or both.
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2 CPAs’ Liability under common law: Liability to clients Burden of proof is on the plaintiff. Must prove: 1. Duty : CPA accepted a duty of due professional care to exercise skill, prudence, and diligence. 2. Breach of duty : CPA breached duty of due professional care through negligent performance. 3. Losses (damages) : The client suffered losses. 4. Causation (proximate cause) : The damages were caused by the CPA’s negligent performance. Auditors’ defenses under common law—liability to clients 1. 2. CPAs’ Liability under common law: Liability to Third Parties 1. Ultramares or Known user (also “near privity” or “primary beneficiary”) approach: Ultramares vs. Touche Touche audited Stern & Co. Ultramares loaned money to Stern. Stern went bankrupt and Ultramares sued the auditor for ordinary negligence. Case established that:
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WP%2004%20Legal%20Liab%20Students - Chapter 4 Legal...

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