Chapter 48 Professional Liability & Accountability

Business Law: Text and Cases - Legal, Ethical, Global, and Corporate Environment

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Professional Liability and Accountability 1. Potential Liability to Clients a. Liability for Breach of Contract a.i. Accountants and other professionals face liability under the common law for any breach of contract. a.ii. A professional owes a duty to client to honor the terms of their contract and to perform the contract within the stated time period. a.iii. If the professional fails to perform as agreed in the contract, then they have breached the contract, and the client has the right to recover damages from the professional. a.iii.1. Damages include expenses incurred by the client to hire another professional to provide the contracted-for services and any other reasonable and foreseeable losses that arise from the professional’s breach. b. Liability for Negligence b.i. Accountants and other professionals may also be held liable for negligence in the performance of their services. b.i.1. To establish negligence the plaintiff must prove four elements: duty, breach, causation, and damages b.i.1.a. These elements must be proved in negligence cases against professionals, which often focus on the standard of care exercised by the professional. b.ii. All professionals are subject to the standards of conduct and the ethical codes established by their profession, by state statutes, and by judicial decisions. They are also governed by the contracts they enter into with their clients. b.iii. Professionals must exercise the established standards of care, knowledge, and judgment generally accepted by members of their professional group. b.iv. Accountant’s Duty of Care b.iv.1. Accountants play a major role in a business’s financial system. b.iv.2. Accountants have the expertise and experience necessary to establish and maintain accurate financial records, as well as design, control, and audit record- keeping systems. b.iv.3. Also have the appropriate education and training to prepare reliable statements that reflect an individual’s or a business’s financial status, give tax advice, and prepare tax returns. b.iv.4. An accountant must possess the skills that an ordinarily prudent accountant would have and must exercise the degree of care that an ordinarily prudent accountant would exercise. b.iv.5. GAAP and GAAS b.iv.5.a. Accountants must comply with generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS). b.iv.5.b. The Financial Accounting Standards Board (FASB) determines what accounting conventions, rules, and procedures constitute GAAP at a given point in time. b.iv.5.c. GAAS are standards concerning an auditor’s professional qualities and judgment that he or she exercise in auditing financial records. b.iv.5.d.
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Chapter 48 Professional Liability & Accountability -...

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