...Chapter 4--Overview of Auditor’s Legal Liability Liability to Clients-Common Law An auditor is in a contractual relationship with a client. If the auditor does not perform his or her side of the bargain according to contract terms the client can sue for breach of contract. A client may seek these remedies for breach of contract: (1) specific performance; (2) general monetary damages for losses incurred as a result of the breach; and (3) consequential damages that occur indirectly as a result of the breach. An accountant may also be sued by a client under tort law. A tort is a wrong committed which injures another person’s property, body, or reputation. A tort suit by a client is usually based on negligence or fraud. The elements of a tort action for negligence are as follows:1 A client may also sue an accountant for fraud. This tort is harder to prove than negligence because fraud requires scienter or an intent to deceive. Fraud contains these elements: A material fact is one that a reasonable person would consider important in deciding whether to act. Also, an accountant may be held liable for gross negligence by a client. Gross negligence does not require scienter but necessitates proof of reckless disregard of the truth or one’s duties. Gross negligence is referred to by some as constructive fraud. No legal question arises about a client’s right to sue (i.e., standing to sue) because the client and accountant are in privity. Privity refers to the existence of a direct...
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...Case II. Terms A. Ordinary Negligence B. Gross Negligence C. Fraud D. Joint and Several Liability E. Proportionate Liability III. Limited Liability Partnerships vs. Limited Liability Corporations 4-1 Legal Responsibilities of the Independent Auditor I. Statutory Laws - Potential legal liability as defined by the Securities Act of 1933, the Securities Exchange Act of 1934, the Rico Act of 1970, and the Private Securities Litigation Reform Act of 1995. Questions concerning the Securities Acts of 1933 and 1934. 1. Describe the general purpose of each Act. 2. How does the auditor become subjected or exposed to each Act? 3. What are the specific provisions of each Act? Include in your discussion: -Who is the plaintiff? -Who has the burden of proof? -What civil or criminal penalties are provided by the Acts? A. Securities Act of 1933 1. Regulates the initial sale of securities in interstate commerce. 2. Auditor becomes subjected to the Act when he/she audits the financial statements that must be submitted with the registration statement to the SEC in order to sell securities to the public. 4-2 3. Provisions of the 1933 Act: a. Plaintiff may sue the auditor for ordinary or gross negligence or fraud. b. Plaintiff must...
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...Before You Sue The Accountants Daniel J. Hurson Even if it looks like a strong case, be careful—there are some surprising defenses. IN THE WAKE OF the corporate accounting scandals that have dominated the business news for the last few years, as well as recurring announcements of large settlements in class action suits against major accounting firms, the prospect of a malpractice case against an accounting firm would at first glance seem attractive. Juries are presumably more predisposed to view accountants with renewed skepticism, when hardly a news cycle passes without some reference to accounting fraud, investigations, and the occasional large-scale debacles like the demise of Arthur Andersen, not to mention the high-profile criminal prosecutions that have recently gone to trial. Daniel J. Hurson, formerly Assistant Chief Litigation Counsel at the SEC, practices securities enforcement and accounting malpractice law in Washington, D.C. His website is www.hursonlaw.com. 25 26 The Practical Lawyer April 2006 Accountant malpractice litigation is a minefield of arcane judicial doctrines layered over pleading and discovery traps that can bury the best plaintiffs’ counsel. Indeed, among the players in these sagas, the accountants sometimes offer the best litigation target. The companies themselves have often tanked; the errant executives dismissed, awash in legal problems, and without insurance coverage; but the accountants (Andersen notwithstanding)...
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...99 Chapter 8 Litigation Services Provided by Accountants CHAPTER SUMMARY Overview This chapter explains what standards apply to accountants when they perform litigation services, discusses how to qualify as an expert witness, gives tips for testifying at a deposition or trial, and points out the potential liability that accountants risk when they testify at trial. Litigation in the United States ¶8001 U.S. Tort Costs Climbing The U.S. tort system cost $248.1 billion in 2009, which was about $808 per U.S. citizen ($12 in 1950). U.S. tort costs accounted for 1.74 percent of GDP (2.09 in 2002). Increasingly inefficient, the U.S. tort system returns less than 50 cents on the dollar to people it is designed to help; only about 22 cents to compensate for actual loss. ¶8006 A Dispute Begins There are two different courtroom environments: civil and criminal. Some experts believe it is more difficult to convict in a criminal trial (e.g., Casey Anthony). Types of Litigation Services Provided by Accountants ¶8011 Consultant An accountant may be hired by an attorney to gather and interpret facts, prepare analyses, help the attorney interpret evidence, advise about issues and strategies involved in a legal matter, locate other accountants to act as consultants or expert witnesses, and help expert witnesses form their opinions. Accountants acting as consultants will not be asked to testify in a judicial or regulatory proceeding, and their work usually will be protected from disclosure...
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...Plaintiff and Appellant, v. ARTHUR YOUNG & COMPANY et al., Defendants and Appellants. No. B087488. COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION THREE 52 Cal. App. 4th 820; 60 Cal. Rptr. 2d 780; 1997 Cal. App. LEXIS 89; 97 Cal. Daily Op. Service 948; 97 Daily Journal DAR 1354 February 7, 1997, Decided SUBSEQUENT HISTORY: [***1] The Name of this Case has been Corrected February 26, 1997. Review Denied April 30, 1997, Reported at: 1997 Cal. LEXIS 2448. PRIOR HISTORY: APPEAL from a judgment of the Superior Court of Los Angeles County. Super. Ct. No. C731746. Dion G. Morrow, Judge. DISPOSITION: The judgment is reversed as to Mattco's award of damages, except the portion that awarded Mattco out-ofpocket-expenses and interest thereon, which is affirmed. CASE SUMMARY: PROCEDURAL POSTURE: Appellant accounting firm sought review of the judgment from the Superior Court of Los Angeles County (California), which found in favor of respondent client in jury verdicts on respondent's malpractice action following the trial court's ruling that to establish liability and damages respondent needed to show only that appellant caused respondent to suffer harm and that respondent's underlying action had value. OVERVIEW: Respondent client filed a malpractice suit against appellant accounting firm, alleging that appellant had negligently provided accounting litigation support in respondent's federal action against another manufacturer. In the federal action, appellant...
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...Bankruptcy Examiner’s Report in Auditor Malpractice Suits A bankruptcy examiner’s report may provide a roadmap to auditors’ negligence, breach of contract, gross negligence, and / or cooperation to cover up fraud committed by the debtor management. A bankruptcy examiner is appointed by the court to investigate the debtor and the debtor’s estate for the purpose to determine if fraud, dishonesty, misconduct, incompetence, and irregularity by the debtor management has occurred before and during the filing of the bankruptcy. The judge call for an examiner based on a request from the trustee, the creditors, major shareholders, and / or his personal judgment. The parties who utilize the finding of the examiner’s report to sue the auditor for malpractice are the trustees, creditors, major shareholders of the debtor, and any other party that may find joining the lawsuit is in the best interest of the society. The examiner’s investigation- first- focuses on many aspects of the debtor’s assets, liabilities, equities, and how the operation is carried out in compliance with rules and regulations. The examiner gathers, verifies, tests, and interprets information from different sources (employees, customers, vendors, lenders, and other professionals who provide service to the entity under investigation). Second, through...
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...Florida Supreme Court Tosses Medical Malpractice Caps Lenore LaBree HCS/430 March 17, 2014 Nancy Geedey Florida Supreme Court Tosses Medical Malpractice Caps Medical malpractice law suits are common within the United States. This paper will discuss this regulatory issue and the relationship it has to the nature, sources and functions of the law. The information in this paper will also educate the readers on the medical malpractice laws and the reasoning for caps being placed on malpractice. Malpractice is a form of negligence that is defined as “professional negligence” (Fremgen, 2012 p. 39, para. 6). Both malpractice and negligence relate to wrongdoing. Negligence leads to liability in malpractice. Professional malpractice includes physicians, nurses, lawyers, accountants, pharmacists, and other health care professionals (Fremgen, 2012). This is why it is important for health care professionals to carry medical malpractice insurance. This type of insurance is costly for physicians, but is a must for physicians to have in the event he or she loses a litigation case. The physicians’ medical malpractice insurance also covers the employee within the facility that are not licensed. Because of the nature of today’s litigation on medical malpractice most other licensed medical professionals carry his or her own insurance for reassurance. In the past, people could sue hospitals and/or physicians for medical malpractice and a jury would decide how much the patient would be...
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...Forensic Accounting In Practice Contemporary Business 508 This paper discusses the role of forensic accounting practices. It takes a look at the skills sets of forensic accountants and the role they play out in the court room. It goes also analyzes the legal responsibilities of a forensic accountant form a professional perspective as their role for expert opinion in the court room. A forensic accountant is someone uses their accounting credibility for investigative or other legal applications, such as corporate acquisition, divorce proceedings, insurance settlements, or other legal purposes (Brody, Melendy, & Perri, 2012). Determine the most important five (5) skills that a forensic accountant needs to possess and evaluate the need for each skill. Be sure to include discussion regarding the relationship between the skill and its application to business operations. The first identifiable important skill for a forensic accountant to posses is investigative intuitiveness. The forensic accountant should possess creative and analytical thinking (DiGabrielle, 2008). According to DiGabrielle, the ability to solve a financial puzzle with an incomplete set of pieces is an extremely important characteristic for forensic accountants (p. 336). The forensic accountant is providing a service to a client for the purpose of expert information as it pertains to legal matters or for the purpose of finding or preventing financial misrepresentation. Their role is not to merely...
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...Forensic Accounting Practice Bradford Clark Professor Dr. Hanners Lithonia Campus BUS 508 – Contemporary Business March 1, 2012 Strayer University Determine the most important five (5) skills that a forensic accountant needs to possess and evaluate the need for each skill. Be sure to include discussion regarding the relationship between the skill and its application to business operations. A forensic accountant is a specialist in accounting and financial systems that is trained to detect white collar fraud. Forensic Accounting is a fast growing field in the in the field of accounting. Although it has been around for a long time, it has become increasingly popular in the past few years as there have been a number of corporate scandals, stricter reporting, and internal control regulations involving public awareness and importance in the business world. With the state of the world’s economy forensic accountants are in high demand. Forensic accountants should at least possess a Bachelor degree in accounting. They should also be a Certified Public Accountant (CPA) and may possess other certifications such as Certified Forensic Accountant (CrFA) and Certified Forensic Accounting Professional (CFAP). The skills needed to become a forensic accountant include strategic critical thinking, problem solving/decision making, leadership, interpersonal and communication skills, and professional and ethical behavior. Strategic critical thinking is the ability to link data, knowledge...
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...Chapter 4 Legal Liability Considerations for Auditors * Review Questions 4-1 Several factors that have affected the increased number of lawsuits against CPAs are: 1. The growing awareness of the responsibilities of public accountants on the part of users of financial statements. 2. An increased consciousness on the part of the SEC regarding its responsibility for protecting investors’ interests. 3. The greater complexities of auditing and accounting due to the increasing size of businesses, the globalization of business, and the intricacies of business operations. 4. Society’s increasing acceptance of lawsuits. 5. Large civil court judgments against CPA firms, which have encouraged attorneys to provide legal services on a contingent fee basis. 6. The willingness of many CPA firms to settle their legal problems out of court. 7. The difficulty courts have in understanding and interpreting technical accounting and auditing matters. 4-2 The most important positive effects are the increased quality control by CPA firms that is likely to result from actual and potential lawsuits and the ability of injured parties to receive remuneration for their damages. Negative effects are the energy required to defend groundless cases and the harmful impact on the public’s image of the profession. Legal liability may also increase the cost of audits to society, by causing CPA firms to increase the evidence accumulated. 4-3 Business failure...
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...criminals using DNA samples, fingerprints, bloodstains, photos and other clues. So at first, you may wonder how the word "forensic" could ever be joined with the word "accounting." It's not as if you've seen accountants working with the other investigators at a crime scene. However, it really depends on the type of crime. “Auditor should be watchdog and not be the bloodhound”. It’s a good quote that every auditor should know. This quote makes the definition of forensic accountants even simpler. The forensic accountant is the bloodhound of Book keeping. External auditors look at the numbers but the forensic auditors look beyond the numbers. Only Forensic just means "relating to the application of scientific knowledge to a legal problem" or "usable in a court of law." Most of the crimes, such as homicides, investigated on a show like "CSI" are known as "crimes against the person." Forensic accounting is simply a specialty field within the broader arena of accounting. The types of crimes forensic accountants investigate are classified as "crimes against property." They investigate crimes such as fraud and give expert testimony in court trials. They also perform work related to civil disputes. Forensic accountants are also known as fraud investigators, investigative accountants, forensic auditors or fraud auditors. Although forensic accounting may not sound as glamorous as its other investigative counterparts, the field has received more attention in recent years. This is due...
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...a forensic accountant needs to possess and evaluate the need for each skill. A forensic accountant assists organizations and individuals chiefly to provide management support in the form of reviews for fraud detection and litigation support, especially through expert witness testimony. In conducting an investigation, a forensic accountant applies specialized skills and technical abilities including: Understanding of law and rules of evidence—A forensic accountant is familiar with criminal and civil law and understands courtroom procedures and expectations. Understanding rules of evidence ensures that all the findings and related documentation is admissible in court. A forensic accountant possesses a basic understanding of the legal process and legal issues. Critical and analytical investigative skills—"An auditor may be a watchdog, but a forensic accountant is a bloodhound!" A forensic accountant must possess a high level of skepticism and the "tenacity of a detective" to thoroughly examine situations for red flags suggesting fraud. Understanding theories, methods, and patterns of fraud abuse—A forensic accountant thinks creatively in order to consider and understand the tactics a fraud perpetrator may use to commit and conceal fraudulent acts. A forensic accountant thinks like the individual who would manipulate accounting records or misrepresent circumstances to defraud the company. Well developed interpersonal and communication skills—A forensic accountant clearly and...
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... 05/19/2013 forensic accountant CONTEMPORARY BUSINESS forensic accountant CONTEMPORARY BUSINESS 125/19/20135/19/20135/19/2013 fraud busters In today’s world, it is knows by everyone that different developments were taken place in the last periods. Our globalized world in a state of continuous technological change and innovations has been challenged by new generation criminology risk factors. From business, government, regulatory authorities, and the courts evidence indicates that a higher level of expertise is necessary to analyze current financial transactions and events. Forensic accounting is a specialized area of an accounting practice that describes engagements which results from actual or anticipated disputes or litigations. Forensic accounting has been defined as accounting analyzers that can uncover possible fraud that is suitable for presentation in court. A Forensic accountant needs accounting, law, finance, investigative and research skills to identify and prevent fraud. Forensic accountant uses her/his knowledge of accounting, law, and criminology to uncover fraud, as well as gather any evidence and present it to the court....
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...LEB Exam 2 Review Cases: * In re Sept. 11 Litigation (S.D.N.Y. 2003) (Class action lawsuit) – Negligence – Duty of Care * Families of people who died in the attack sued American Airlines and Aviation security companies who were responsible for on-the-ground security in the Boston airport on 9/11 * Argued that they were carless in screening passengers * D’s defense: no duty to the victims in New York because this type of event has never happened in the past * Verdict: Not dismissed * When a plane is hijacked, it is reasonably foreseeable that the plane may crash, making passengers AND OTHERS AT THE CRASH SITE reasonably foreseeable victims * Not overly burdensome (Factor 6) to impose duty because D is in the business of moving people SAFELY from place to place * Otis Engineering Co. vs. Clark (Tex. 1983) – Negligence Duty of Care * Two women killed by drunk driver (he worked for Otis and was sent home because he was drunk at work) * Is there a duty to control the conduct of another? * General rule: No (usually when employees are not following through with company practices, company not held responsible) * Exception: Employer’s exercise of control over INCAPICTATED employee = employer must do what reasonably careful employer would do under similar circumstances * Duty of reasonable care generally does not include a duty to control the activities of others to prevent the employee...
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...and Essays Category: Business Autor: anton 07 May 2011 Words: 2202 | Pages: 9 Week Five Case Studies Team D ACC 492 January 15, 2007 CASE 8.1 FRED STERN & COMPANY, INC. 1. Observers of the accounting profession suggest that many courts attempt to Ў§socializeЎРinvestment losses by extending auditorsЎ¦ liability to third-party financial statement users. Discuss the benefits and costs of such a policy to public accounting firms, audit clients, and third-party financial statement users, such as investors and creditors. In your view, should the courts have the authority to socialize investment losses? If not, who should determine how investment losses are distributed in our society? The word "socialize" is used to suggest a socialist society in which profits and losses are shared by and distributed to the general public by the central government through taxation, legistration, social welfare, or some other legal means. In contrast, the capitalist society is rewarded to the risk takers alone (the auditors in this case). Until the case of Ultramares Corp. v. Touche, auditors admitted no liability whatsoever to third parties. The judgment in Ultramares reaffirmed the principle that a fraudulent accountant, not a negligent one, would be liable to third parties misled by his or her statements. This case has had an impact on the work of auditors in terms of the care they exercise in preparing the auditor's report. Coercive forces compelled auditors to adopt...
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