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Exam 11: Liability of Accountants and Other Professionals

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Question 31

Multiple Choice

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What must a plaintiff do in order to recover damages under the Securities Act of 1933 after purchasing a security covered by a registration statement containing false information or missing information?

A) A plaintiff must prove that they relied to their detriment on the registration statement.
B) A plaintiff must prove that they were in privity of contract with the accountant at issue.
C) The plaintiff must establish reliance on the document and privity of contract with the accountant.
D) The plaintiff must establish reliance on the financial statement, privity with the accountant, and also that the securities were purchased within the previous 18 months.
E) The plaintiff does not have to prove reliance on the financial statement or establish privity.

F) C) and D)
G) A) and D)

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Question 32

Multiple Choice

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Under most professional indemnity insurance policies, which of the following must be true in order for a claim to be covered?

A) A policyholder must be insured at the time the claim arose or at the time the claim is filed.
B) A policyholder must be insured at the time the claim arose, but does not need to be insured at the time the claim is filed.
C) A policyholder must be insured at the time the claim arose and at the time the claim is filed.
D) A policyholder must be insured at the time the claim is filed, but does not need to be insured at the time the claim arose.
E) A policyholder need only show evidence of current payment of policy premiums.

F) C) and D)
G) A) and C)

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Question 33

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[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege. -Assuming that Norah discussed with Gloria confidential communications that she had with Joel, which of the following is true regarding the ethical nature of that communication?

Whether third parties have a claim against an accountant on the basis of their reliance upon negligently prepared financial statements is the same in all states because it is governed by federal law.

Under the ________, an accountant is liable to known third-party users of the accountant's work product and also to those in the limited class whose reliance on the work the accountant specifically foresaw.

An insurance policy that covers a person for errors or omissions made in the course of carrying out his or her professional responsibilities is sometimes referred to as a[n] ________.

[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". -Under which of the following circumstances would the attorney-client privilege apply to an accountant?

[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 was also charged under Section 15 of the Securities Act. He asserted an affirmative defense claiming he is not liable as he is not a "controlling person" under that statute. Is he correct?

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege. -What is Norah's contract with Joel to do audit work for him called?

Which of the following is true about professional indemnity insurance?

Deiandra is an accountant who just completed an audit. Deiandra will issue a[n] ________ stating her assessment of the company that she audited.

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place. -If Kayla is called to testify at trial, would she likely be required to reveal information about Carter's remarks at the baseball game?

The reasonably foreseeable users test holds an accountant liable to any third-party who was or should have been foreseen as a possible user of the accountant's work product and did, in fact, use and rely upon that work product for a proper business purpose.

As set forth in the case in the text, Bily v. Arthur Young & Co., which of the following is true regarding auditor liability to third parties under the Restatement rule?

Generally, unless engaged to detect fraud an accountant is not a(n) ________ unless the fraud is uncovered in the course of exercising reasonable care and skill.

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place. -Which of the following, if true, would likely persuade a judge to require Kayla to testify about Carter's financial statements?

Which of the following is true regarding states that have adopted the reasonably foreseeable users test for accountant liability to third parties?

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege. -Which of the following is not a requirement in order to recover damages under Section 10(b) of the Securities Exchange Act of 1934 and the corresponding SEC Rule 10b-5?

Luca, a newly licensed certified public accountant, performed an audit for ABC Corporation. Shortly after the audit, a number of company officials were indicted for fraud. Luca tells his boss, Olivia, that he is not concerned because he had no duty under GAAS or GAAP to detect fraud and that so long as those obligations were met, he had no duty to do more. He says that auditors are not expected to have perfect judgment. Set forth what the initials GAAS and GAAP represent. Additionally, discuss whether Luca is correct on the following issues, and why or why not: 1. His contention regarding compliance with GAAS and GAAP completely satisfying auditing obligations. 2. His contention regarding the obligation of auditors in relation to fraud. 3. His contention that auditors are not required to have perfect judgment.

[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 believes that the disclaimer in his opinion letter protects him from liability. Is he correct?