Legal Responsibilities

Common Law Liability- Plaintiff must show accountant failed to

exercise due care to recover money damages

Negligence- (reliance need not be proven)

1. Duty of care breached
2. Cause
3. Harm

Fraud- Punitive Damages may be assessed for actual or constructive

fraud
Misrepresentation
Scienter (Reckless disregard for truth- “constructive fraud”)
Reliance
Intent to deceive
Damages

Civil Liability to 3rd Parties

Ordinary Negligence- Privity must be shown to recover damages for
ordinary negligence.

Gross Negligence- Extends liability to unknown 3rd parties

Ultramares Doctrine- accountant is only liable for negligence to

parties for whose primary benefit the work was intended.

Fraud (must show)-

1. Material Misstatement or Omission
2. Scienter
3. Reliance
4. Damages suffered

Securities Act of 1933

• Requires registration statement issued prior to IPO in interstate
commerce
○ Includes audited F/S
○ Liability extends to issuance date (not when work was
completed)
• Requires prospectus be provided to investors
• Liability under Section 11
○ No contract required, anyone who bought the security can sue
○ Must only show registration statement was inaccurate
○ Reliance & Privity need not be shown
○ Defense: Due Dilligence
○ Damages: Loss on sale of stock, or difference between IPO
price and Market Value when suit is brought.
○ Statute of Limitations: 1 year from time error should have
been discovered. In any case, cannot exceed 3 years from
the IPO
○ Must only show:
Legal Responsibilities
 Duty of Care existed
 Breach of that duty
 Cause
 Injury

Securities Act of 1934

• Regulates securities traded on national exchanges
• Applies to: Companies w/ >$10m in assets, and 500+ equity
security holders on last day of fiscal year
• Requires that 10K be filed
• Civil liability for making false/misleading statement regarding a
material fact
• Investor’s Burden of Proof:
○ Bought/Sold security at price affected by misleading
statement
○ Unaware of misstatement or error
○ Reliance
○ Scienter on part of accountant
• Defense: Good Faith
• Mere negligence = No Liability under the 1934 Act

Prohibited Non-Audit Services to Audit Client

• Bookkeeping; financial information system design and
implementation; appraisal or valuation services; actuarial services;
internal audit outsourcing services; management functions or
human resources; broker or dealer investment advisor or
investment banking services; and legal and expert services.