Chapter 44. Accountants’ Legal Liability
1. Mary tells her accountant, “I must have this year’s audit completed by March 1.” The accountant agrees to complete
the audit by March 1. Under general contract law, if the audit is not completed by March 1, Mary does not have to
pay the accountant for the audit.
a. True
b. False
2. Under the majority view and the Restatement test for determining liability, negligence of an accountant in conducting
an audit may result in damage awards to potential investors.
a. True
b. False
3. Criminal sanctions for accountants are limited to punitive fines.
a. True
b. False
4. An accountant must disclose the contents of his working papers under a court order.
a. True
b. False
5. An accountant-client privilege is statutorily recognized in some states and would generally permit the accountant to
refuse to disclose confidential information gleaned from his client.
a. True
b. False
6. An accountant who commits fraud may be held liable for compensatory, but not punitive, damages.
a. True
b. False
7. As a result of the Sarbanes-Oxley Act, the lead audit partner having primary responsibility for the audit and the audit
partner responsible for reviewing the audit must rotate at least every three years.
a. True
b. False
8. An accountant’s liability under the federal securities laws is basically the same as the liability at common law.
a. True
b. False
9. The common law recognizes an accountant-client privilege.
a. True
b. False
10. In most statutes granting an accountant-client privilege, it belongs to the client and not to the accountant.
a. True
b. False
11. Most courts allow an accountant to raise the defense of the plaintiff’s contributory or comparative negligence.
a. True
b. False
12. A tax client wishing to defer income he earned this year asks his accountant to misstate information on his tax
return. If the accountant does so, she may be subject to fines and up to five years in prison.
a. True
b. False
13. Historically, privity of contract was not a requirement for a cause of action based on an accountant’s liability for
negligence.
a. True
b. False
14. An implied agreement in the contractual relationship is the agreement by the accountant to act in a competent and
professional manner.
a. True
b. False
15. For negligence cases, the Restatement has adopted the requirement of privity as set forth in the landmark opinion of
Judge Cardozo in Ultramares Corp. v. Touche.
a. True
b. False
16. Foreseen plaintiffs under the Restatement view of tort liability for an accountant include potential investors and the
general public.
a. True
b. False
17. The client is generally held to be the owner of the working papers the accountant uses in performing an audit.
a. True
b. False
18. An accountant who contractually promises to conduct an audit to detect possible embezzlement is under a
contractual obligation to provide for the client an expanded audit beyond Generally Accepted Auditing Standards.
a. True
b. False
19. An accountant has a duty to comply with court orders, client requests, and Generally Accepted Auditing Standards
with regards to disclosure of a client’s confidential information.
a. True
b. False
20. Scienter is not a requirement for an accountant to be civilly liable under Rule 10b-5.
a. True
b. False
21. An accountant’s legal liability is imposed both by the common law at the state level and by securities laws at the
federal level.
a. True
b. False
22. Section 11 of the 1933 Securities Act imposes liability upon an accountant for negligence in the conduct of an audit.
a. True
b. False
23. An accountant who willfully violates Section 11 of the 1933 Securities Act will be subject to criminal liability.
a. True
b. False
24. Accountants authorized under federal law to practice before the IRS have the privilege of confidentiality for tax
advice given to their client-taxpayers with respect to Internal Revenue Code matters.
a. True
b. False
25. The Ultramares case involved the liability of an accountant under the Securities Act of 1933.
a. True
b. False
26. In recent years, more and more courts have followed the Ultramares doctrine in deciding cases.
a. True
b. False
27. An accountant who substantially performs his contractual duties under a contract with a client is entitled to
compensation at the agreed upon rate less any damages he has caused the client.
a. True
b. False
28. An accountant has no liability to third parties other than the client.
a. True
b. False
29. Matt agrees to perform an audit within 30 days, knowing that time is of the essence. When the 30 days are up, Matt
has only performed 60% of the audit. Matt has materially breached his contract.
a. True
b. False
30. An accountant who acts in a reasonably competent and professional manner is an insurer of the accuracy of her
report.
a. True
b. False
31. Which of the following can be the basis for an accountant‘s liability under state law?
a. Contract law and negligence, but not criminal law
b. Tort law, contract law, and criminal law
c. Negligence, criminal law, and strict liability
d. Intentional torts and negligence, but not contract law
32. An accountant‘s records, including the data-gathering process followed and the information and conclusions drawn
therefrom are known as:
a. tax returns.
b. working papers.
c. rough drafts.
d. privileged communication.
33. The failure by an accountant to use the care of a reasonably competent accountant is:
a. negligence.
b. material breach.
c. substantial performance.
d. fraud.
34. Which of the following defenses may be raised by an accountant under Section 11 of the 1933 Securities Act?
a. Privity and due diligence
b. Privity, but not due diligence
c. Due diligence, but not privity
d. Neither privity nor due diligence
35. In which of the following types of cases can issues of accountant-client confidentiality arise?
a. Civil litigation
b. Criminal cases
c. Tax disputes
d. All of these are situations where it can arise.
36. The Sarbanes-Oxley Act prohibits accounting firms from performing which of the following services for audit
clients?
a. Bookkeeping
b. Implementing financial information systems
c. Actuarial services
d. All of these
37. Which of the following could give rise to an accountant‘s criminal liability?
a. Falsely completing a tax return
b. Tampering with accounting records
c. Advising a client to falsely complete his own tax return
d. All of these could subject an accountant to criminal liability.
38. When can an accountant release audit working papers?
a. When a client consents
b. When a court orders disclosure
c. Both of these.
d. Neither of these.
39. The court’s holding in Ultramares Corporation v. Touche:
a. emancipates accountants from the consequences of fraud.
b. relieves accountants from liability for reckless misstatement.
c. establishes that an accountant’s liability for negligence is limited to cases in which there is privity of contract.
d. shows no concern for exposure of accountants to liability in an indeterminate amount for an indeterminate
time to an indeterminate class.