Chapter 48
Professional Liability
and Accountability
Answers to Questions
at the Ends of the Cases
Case 48.1—Questions (Page 937)
What If the Facts Were Different?
Suppose that Walsh had not been a CPA but had falsely advertised himself as a CPA. Could
sanctions have been imposed under those circumstances? Explain why or why not. Yes.
There is a sufficient connection between the practice of accountancy and a person’s
misrepresenting himself as a CPA. The Nebraska State Board of Public Accountancy could
have imposed sanctions on Walsh for improperly advertising that he was a CPA. And there
may have been other legal consequences. (In fact, Walsh did improperly advertise himself
as a CPA. He had been licensed for several years but had failed to meet the continuing
education requirements. Despite this failure to comply, he had advertised that he was a
CPA without including a disclaimer that he was an “inactive registrant.” The board had
imposed sanctions for this transgression.)
The Ethical Dimension
Was the specific purpose for Walsh’s impersonation significant to the result in this case?
Why or why not? No. The misrepresentation could have been for almost any purpose. It
was the ethical breach consisting of falsity and its “taint” on the accountancy profession
that resulted in the imposition of sanctions on Walsh.
Case 48.2—Questions (Page 940)
1A. If the children had suffered no harm as a result of the attorney’s malpractice, would
the outcome of this case have been different? Why or why not? Yes. In fact, very likely
there would not be a case, because Guido sought to recover damages only for the children
(realizing that she had no chance of recovering because the Statute of Limitations had
expired). Because of the attorney’s malpractice, Guido was unable to proceed with the
wrongful death suit against the hit-and-run driver who was responsible for the death of the
children’s father. It is possible that she could have won a significant amount of damages in
that lawsuit for the children’s sake. Because of the attorney’s malpractice, the children
were deprived of these potential damages. If, however, it would have been impossible to
obtain damages for the children (an unlikely scenario), then the children would have
suffered no harm, and there would have been no reason for the lawsuit in the first place.
Generally, the courts consider a number of factors when deciding whether an attorney’s
duty extends to third parties in a particular situation or transaction. One of these factors—
the extent to which the transaction was intended to affect the third party—was stressed by
the court in this case. The court noted that the children were the direct and intended
beneficiaries of the attorney-client contract, or relationship. Another factor is the degree of
certainty that the third party suffered injury. Still other factors include the foreseeability of
harm, the closeness of the connection between the attorney’s conduct and the injury
suffered, the policy of preventing future harm, and whether recognition of liability under
the circumstances would impose an undue burden on the legal profession. As you can see,
in this case most of these factors weighed in favor of holding the attorney liable to the
children.
2A. Why did the court affirm the dismissal of Guido’s individual claim but not the claims
that she had brought on behalf of the children? Guido’s claim was dismissed because she
had not filed the malpractice suit against the attorney until after the Statute of Limitations
had expired. The claims she had brought on behalf of the children, however, were not
dismissed. This was because the court held that the Statute of Limitations was “tolled,” or
suspended, during their minority, meaning that they were still entitled to bring suit against
the attorney (through Guido).
Case 48.3—Questions (Page 947)
What If the Facts Were Different?
If Todman had conducted an audit for DBI but had not issued a certified opinion about
DBI’s financial statements, would the result in this case have been the same? Explain. The
court noted in this case that “if an accountant does not issue a public opinion about a
company, although it may have conducted internal audits or reviews for portions of the
company, the accountant cannot subsequently be held responsible for the company’s public
statements issued later merely because the accountant may know those statements are
likely untrue.”
The Legal Environment Dimension
Did Overton have a valid reason to sue DBI’s auditors? Why or why not? Yes, the
investors were dissatisfied with the result of their investment and looked for the most
likely scapegoat, which here was the accountant. Sometimes, one must simply suffer the
consequence of a bad turn o fate. No, because for economic and other progress, there must
be standards and those standards must be applied. In circumstances like those in the
Overton case, when an accountant issues a certified opinion, it creates a special
relationship with investors. Thus, accountants have a duty to take reasonable steps to
correct misstatements that they discover in previous financial statements on which they
know the public is relying. The applied standard here is that silence in this situation can
constitute a false or misleading statement under Section 10(b) and Rule 10b-5.
Answers to Questions in the Reviewing Feature
at the End of the Chapter
1A. Failing to detect material omissions
What constitutes negligence may vary according to judicial decision and state statutes, but
complying with GAAP and acting in good faith are defenses only to a prima facie case and
