Chapter 45 Outline

Chapter 45 Outline - CH.45 Accountants Legal Liability...

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CH.45 Accountants’ Legal Liability Overview : Accountants perform a number of important roles in out business society. One such role is to provide reliable financial information to facilitate the effective and efficient allocation of resources in the economy. An accountant is subject to potential civil liability arising from the professional services he provides to his clients and third parties. This legal liability is imposed both by the common law at the State level and by securities laws at the Federal level. Additionally, an accountant may violate Federal or State criminal law through the performance of his professional activities. This chapter will deal with accountants’ legal liability under both State and Federal law. Common Law An accountant’s legal responsibility under State law may be based upon: (1) contract law, (2) tort law, or (3) criminal law. The common law provides accountants with certain rights and privileges: in particular, the ownership of their working papers and, in some States, a limited accountant-client privilege. Contract Liability- the employment contract between an accountant and her client is subject to the general principles of contract law. For the contract to be binding, it must meet all of the requirements of a common law contract, including offer and acceptance, capacity, consideration, legality. engagement letter- a letter used to enter into a contract explicit duties- the accountant is bound to perform all the explicit duties she agrees to provide under the contract o For example, if an accountant agrees to complete the audit of a client by October 15 so that the client may release its annual report on time, the accountant is under a contractual obligation to do so. Implicit duties- upon entering a contract, an accountant also implicitly agrees to perform the contract in a competent and professional manner. His agreement to render professional services holds an accountant to generally accepted standards, GAAP and GAAS. Although accountants don’t need to ensure the absolute accuracy of their work, they must exercise the care of reasonably skilled professional. Breaches- an accountant who breaches his contract incurs liability not only to his client but also to certain third-party contract beneficiaries. o A third-party beneficiary- a noncontracting party whom the contracting parties intend to receive the primary benefit under the contract. For example, Otis Manufacturing Co. hires Adler, an accountant, to prepare a financial statement of Otis to use in obtaining a loan from Chemical bank. Chemical Bank is a third-party beneficiary of the contract between Otis and Adler. Another example of a potential third party is an investor considering the purchase of part or all of a particular company .
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o Material Breach- an accountant who materially breaches his contract is entitled to no compensation (i.e. the client is discharged from his obligations under the contract because of the material breach).
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This note was uploaded on 03/17/2011 for the course BUL 3350 taught by Professor Bailey during the Spring '11 term at FSU.

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Chapter 45 Outline - CH.45 Accountants Legal Liability...

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