Twomey & Jennings BUSINESS LAW

1. Twomey & JenningsBUSINESS LAW Chapter 46 Accountant’s Liability and Malpractice

2. Ronson v Talesnick (1999) Was the accountant negligent? What is Malpractice? • When a contract requires a party to perform services, the party must perform with the care exercised by persons performing similar services within the same community. • If the party negligently fails to observe those standards, there is both a breach of contract and a tort.

3. Breach of Contract Malpractice Tort Accountant is negligent or commits fraud. Plaintiff must show that defendant’s breach was negligent or willful. Accountant (party to contract) fails to fulfill duties. Breach of Contract Tort Malpractice Malpractice consists of both: Plaintiff bringing suit for malpractice may choose which action to pursue:

4. In choosing which action to pursue, a plaintiff may consider: BREACH OF CONTRACT TORT LIABILITY Damages Statue of Limitations Differences Can Be Greater Than Contract Law Damages Limited by Contract Runs from Date When Contract Was Broken Runs from Date When Harm Was Discovered

5. AUSA Life Insurance Co. v Ernst & Young (2000) Is the firm liable when the company goes belly up? Liability to Third Parties • No privity of contract: third persons may also sue the wrongdoer for malpractice. • When the malpractice suit is brought against an accountant for negligence, courts differ as to when a third person may sue and what the plaintiff must show to bring such a suit.

6. Williams Controls v Parente, Randolph, Orlando & Assoc. (1999) Is the firm liable to the buyer of the business? Liability to Third Parties • Liability is evaluated by one of these rules: Privity Contact Known User Foreseeable User Intended User Flexible Unknown User

7. Theories of Liability • Some courts refuse to let the third person sue; these courts require PRIVITY between the parties. • In New York, sufficient CONTACT with the third party can make the accountant liable just as if there was privity. • In some states, it is sufficient that the third person was a KNOWN USER of the accountant’s information.

8. Theories of Liability (cont’d) • Some courts go allow third parties to sue if it was REASONABLE TO FORESEE that the third party use the accountant’s information. • Some courts limit suit to those nonprivity plaintiffs who were INTENDED to rely on the accounting work. • A few courts use a FLEXIBLE approach, deciding each case as it arises. • Finally, an accountant is not liable to a non-privity UNKNOWN party when the accountant has no knowledge of any way the party could be affected.

9. Malpractice (Tort) Liability for Statutory Violations Breach of Contract Anyone in Privity of Contract Client Beneficiaries of Statutory Protection (Section 11-1933 Act Section 10b-1034 Act) Liability to - Differing Decisions Known-User Contacts Foreseeable User No liability to Interloper Liabilities

10. Defenses To Liability • To a limited degree, an accountant is protected from malpractice liability by: • A clear, conspicuous disclaimer of liability, or • The contributory or comparative negligence of the plaintiff.

11. Fraud • When an accountant is guilty of fraud, the intended victim of the fraud may sue the accountant even though privity of contract is lacking.

12. Sarbanes-Oxley Act of 2002 • Imposes significant liability on auditing firms for fraud, securities violations and obstruction of justice. • Auditor Independence. • Public Company Accounting Oversight Board. • Auditors must remain independent (no conflicts of interest).