Malpractice Liability

Question 1

What are the 4 main topics of malpractice liability?

Answer 1

1. Breach of contract
2. Negligence liability to clients
3. Fraud
4. Negligence liability to third parties

Question 2

What is implied agreement?

Answer 2

Per the law, you cannot perform in a non-negligent manner.

Question 3

An accountant is generally not liable to detect fraud unless:

Answer 3

• A normal audit would detect fraud
• Engagement letter states so
• Audit report states so

Question 4

T/F - Accountants can avoid liability by disclaimers.

Answer 4

False

Question 5

T/F - When there is a breach of contract, a client is entitled to punitive damages.

Answer 5

False. Only compensatory damages.

Question 6

What are the elements for recovery in a negligence case?

Answer 6

• Duty
• Breach
• Damages
• Proximate cause

Question 7

T/F - Punitive damages are not allowed in a mere negligence action.

Answer 7

True. Compensatory damages for reasonably foreseeable injury is only allowed.

Question 8

What is proximate cause?

Answer 8

It when the accountant’s negligence is the direct cause of injury.

Question 9

What are the 2 elements of proximate cause?

Answer 9

1. “But for” causation

2. Reasonable foreseeability

Question 10

What are the elements of fraud?

Answer 10

1. Misrepresentation/Omission of fact
2. Materiality
3. Knew or recklessly disregarded falsity
4. Reasonable reliance
5. Damages

Question 11

Actual fraud =

Answer 11

Knowledge (scienter) - accountant knew about the falsity

Question 12

Constructive fraud =

Answer 12

Reckless disregard or gross negligence

Question 13

Describe the Reasonable Foreseeability Approach to

accountant liability.

Answer 13

The accountant is liable to whomever he/she can
reasonably foresee may use the financial statements
he/she certifies or prepares.

Question 14

Describe the Privity Approach of Ultramares v. Touche to

accountant liability.

Answer 14

The accountant is liable only to those with whom he/she

is in privity of contract.

Question 15

List the three primary approaches to accountant liability.

Answer 15

1. The Privity Approach of Ultramares v. Touche
2. The Restatement “Limited Class” Approach
3. The Reasonable Foreseeability approach

Question 16

Describe the Restatement “Limited Class” Approach to

accountant liability.

Answer 16

The accountant has third party
liability to a limited class
of known or intended users of financial statements whose
specific identity need not be known by the CPA.