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Exam 11: Liability of Accountants and Other Professionals

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Question 1

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[BigCom Securities] A&Z and DCB, two large accounting firms, prepared registration statements for BigCom, a large, public company, and provided information on BigCom to the SEC. A&Z's statements contained several misrepresentations about BigCom's securities. Wallace, BigCom's Chairman of the Board of Directors, signed the statements prior to the SEC filing. As is the usual procedure, Wallace signed the statements but did not read them carefully. He heard there were some questionable issues about the quality of the statements, but he felt confident with the expertise of the large accounting firms. Subsequently, purchasers of BigCom claimed there were misrepresentations about BigCom's shares in the statements filed with the SEC and sued A&Z, DCB, and Wallace. All three defendants deny liability. -Wallace claims that he should not be liable because he relied on the accounting firms' expertise with regard to the registration statements. Is Wallace correct?

A) Yes, directors are not required to perform a due diligence inquiry if another expert compiles the statement.
B) Yes, reliance is a valid defense where a director is involved.
C) Yes, but only if the accounting firm performed a due diligence inquiry.
D) No, because he is a director.
E) No, as a director, Wallace cannot use a defense of reliance because he was aware of questionable issues in the statements.

F) C) and E)
G) B) and E)

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Question 2

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The accountant-client privilege means that the accountant has the privilege of demanding payment for accounting services.

A) True
B) False

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Question 3

Multiple Choice

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An accountant's failure to fulfill obligations under GAAP and GAAS is considered prima facie evidence of what?

[Unaudited financial statements] ABC Company hires Abe, an accountant, to create financial statements. Abe creates the financial statements without using general accounting procedures and clearly marks the statements as "unaudited". -When does the attorney-client privilege apply to accountants?

Under common law, what are the three primary types of liability assessed against accountants?

For which of the following does the Securities Exchange Act impose liability?

[Unaudited financial statements] ABC Company hires Abe, an accountant, to create financial statements. Abe creates the financial statements without using general accounting procedures and clearly marks the statements as "unaudited". -Could Abe be liable for the contents of the financial statements?

The Sarbanes-Oxley Act prohibits registered public accounting firms from engaging in non-auditing acts for their auditing clients. List any six such non-auditing acts currently prohibited.

Opal has performed an audit and has various documents that she used to complete the audit including notes, copies, calculations, and memorandums. These documents would be known as:

An accountant is entitled to which of the following in the instance of a breach of contract where the accountant completed substantial performance?

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal. -If Andrew engaged in ________ breach, he is not entitled to compensation for work completed.

Which of the following standards is used in applying the reasonably foreseeable users test regarding accountant liability to third parties?

Norman wants to sue his accountant for fraud, but his accountant was only grossly negligent. What type of fraud could Norman sue for since there was no fraudulent intent?

[Sami's Coffee Shop] Javier, a new accountant who just opened his accounting firm, contracted with LittleBank to engage in accounting work for approval of loan applications. One of the applications was from Sami, owner of Sami's Coffee Shop. Sami provided Javier with copies of her income and loss statements. While looking through Sami's documents, Javier noticed multiple payments in large amounts for items listed only as "inventory" or "miscellaneous office supplies", which was odd since Sami told him the Coffee Shop served only coffee and tea. Javier did not ask Sami about the discrepancy because Sami seemed like an honest person. Javier completed the audit and prepared an opinion letter to LittleBank stating that Sami's Coffee Shop was in excellent financial condition and should feel confident in approving Sami's loan. The letter included a broad, general disclaimer. After sending the letter, Javier procured professional indemnity insurance to protect him from any malpractice claim. A month later, Sami was arrested for selling stolen jewelry from her shop and she defaulted on the loan. -Javier claims that he should not be liable for negligence because Sami committed fraud. Is he correct?

Which statement accurately describes the requirements regarding working papers under the Sarbanes-Oxley Act of 2002?

Due to Enron Corporation's ________, a significant amount of responsibility for that outcome was placed on the firms that provided accounting services to the corporation.

The accountant is the legal owner of working papers after an audit.

Besides attorneys, who else may be held liable in a malpractice action?

At a minimum, the duty of care of the accountant entails compliance with which of the following?

[Sami's Coffee Shop] Javier, a new accountant who just opened his accounting firm, contracted with LittleBank to engage in accounting work for approval of loan applications. One of the applications was from Sami, owner of Sami's Coffee Shop. Sami provided Javier with copies of her income and loss statements. While looking through Sami's documents, Javier noticed multiple payments in large amounts for items listed only as "inventory" or "miscellaneous office supplies", which was odd since Sami told him the Coffee Shop served only coffee and tea. Javier did not ask Sami about the discrepancy because Sami seemed like an honest person. Javier completed the audit and prepared an opinion letter to LittleBank stating that Sami's Coffee Shop was in excellent financial condition and should feel confident in approving Sami's loan. The letter included a broad, general disclaimer. After sending the letter, Javier procured professional indemnity insurance to protect him from any malpractice claim. A month later, Sami was arrested for selling stolen jewelry from her shop and she defaulted on the loan. -Under what theory could LittleBank sue Javier?