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Exam 11: Liability of Accountants and Other Professionals

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Question 41

True/False

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An accountant who commits fraud is liable to those parties he or she reasonably should have foreseen would be injured through a justifiable reliance upon the fraudulent information.

A) True
B) False

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Question 42

Multiple Choice

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An action brought against an accountant who fails to properly perform the job for which the accountant was hired is known as a(n) ________ action.

A) malfeasance
B) malpractice
C) impropriety
D) actuary
E) class

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

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Question 43

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The attorney-client privilege means that information given by a client to his or her accountant cannot be revealed without the client's permission.

Teliva has been hired as an accountant to audit a major firm. Teliva is required as an accountant to use adequate procedures so that they can detect illegal acts committed by an audited company under which of the following acts?

In negligence cases involving the accountant's work, which of the following is true regarding the use of working papers?

Which of the following was the result at the Supreme Court level in Matrixx Initiatives, Inc. v. Siracusano, the case in the text in which the plaintiffs brought a class action alleging that the defendant violated securities laws by failing to release reports that its product, Zicam Cold Remedy, had been found to result in a loss of smell?

[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. -Would DCB likely be held liable for the misrepresentations in the statements filed with the SEC?

[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. -Andrew may be entitled to complete compensation minus the amount of damages caused by the breach if he ________ performed on the contract.

The Public Company Accounting oversight board was created by the Sarbanes-Oxley Act to do what?

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina. -Under the Restatement test, referenced in the text's discussion of the case Bily v. Arthur Young & Co., which of the following is true regarding the action brought by Bank ABC against Amina based upon the loss of funds on Jonathan's loan?

[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. -If Javier is sued for malpractice, is Javier protected from this lawsuit?

Under which of the following tests is an accountant held liable to any third party that was or should have been foreseen as a possible user of the accountant's work product and that, in fact, did use and rely upon that work product for a proper business purpose?

[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. -Which of the following would be available to Dominique, assuming that she can establish that Andrew failed to meet his contractual obligations?

What is the rationale behind the Restatement test of accountant liability to third parties?

[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". -Are there any circumstances under which Abe could be held liable for the contents of the unaudited financial statements?

When can an accountant be held liable to his or her client for fraud?

In the Case Opener "WorldCom," the court ruled that the chairman of WorldCom's board of directors could have no personal liability for misrepresentations of the company's condition in filings with the Securities and Exchange Commission.

Accountants are exempt from being sued for malpractice; this is reserved for attorneys and doctors only.

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina. -Under the Restatement test, referenced in the text's discussion of the case Bily v. Arthur Young & Co., which of the following is true regarding the effort by Bank XYZ to recover against Amina based upon Maggie's default?

[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. -Regarding Joel's assertion that Norah violated the accountant-client privilege, which statement is accurate?