Chapter 48
Professional Liability and Accountability
TRUE/FALSE QUESTIONS
B1. Professionals are obligated to adhere to standards of performance commonly
accepted within their profession.
B2. Accountants and other professionals may not be held liable for negligence in the
performance of their service.
B3. Generally, an accountant must exercise the degree of care that an ordinarily prudent
accountant would exercise.
B4. An accountant is required to discover every impropriety, defalcation, and fraud in a
client’s books.
B5. Attorneys are required to be familiar with well-settled principles of law applicable to a
casa.
B6. A client’s negligence is never a defense to a charge of negligence against an
accountant.
B7. Malpractice is professional negligence.
B8. A professional can be liable for fraud whether or not he or she acted with fraudulent
intent.
B9. Professionals can limit their liability to some extent by disclaiming it.
B10. In most courts, auditors cannot be held liable to third parties for negligence in the
performance of their duties.
B11. Traditionally, a professional owed no duty to those with whom the professional had a
direct contractual relationship.
B12. Generally, an attorney is not liable to a nonclient unless the attorney has committed
fraud.
B13. The Sarbanes-Oxley Act of 2002 applies only to foreign public accounting firms that
provide auditing services to “issuers.”
B14. Under the Sarbanes-Oxley Act of 2002, accountants must retain working papers
relating to an audit or review for a certain period of time.
B15. An accountant may be liable to anyone who acquires a security covered by a
registration statement that contains a materially false statement.
B16. An accountant is not liable for an omission in a registration statement to a purchaser
of securities if the omission had no causal connection to the purchaser’s loss.
B17. An accountant is not liable for a misleading statement that affects the price of a
security if the accountant acted in good faith.
B18. For a plaintiff to recover damages under Section 10(b) of the Securities Exchange Act
of 1934 and SEC Rule 10b-5, privity is necessary.
B19. An auditor must use adequate procedures in an audit to detect any illegal acts of the
company being audited.
B20. Penalties for aiding or assisting in the preparation of false tax returns are limited to
one penalty per taxpayer per tax year.
MULTIPLE CHOICE QUESTIONS
B1. Rex, an accountant, enters into a contract to provide services to Sofi. Rex does not
finish the work within the contract’s deadline. Sofi pays a penalty for the missed
deadline and hires Trey to complete the job. Rex is most likely liable for
a. nothing.
b. Sofi’s penalty and the cost to hire Trey.
c. Sofi’s penalty only.
d. the cost to hire Trey only.
B2. Pluto accuses Quark, an accountant, of committing defalcation. This is
a. embezzlement.
b. general misconduct.
c. professional negligence.
d. throwing something out of a window.
B3. Tiny is an accountant. Tiny’s violation of generally accepted accounting principles and
generally accepted auditing standards
a. does not indicate that Tiny was negligent.
b. is prima facie evidence that Tiny was negligent.
c. precludes Tiny from raising any defense against a negligence claim.
d. is embarrassing but will never subject Tiny to liability.
B4. Estes, an accountant, contracts to perform services for Frasier. In performing those
services, Estes uncovers a suspicious financial transaction. Estes is most likely not
liable if he
a. acted negligently in failing to discover the transaction sooner.
b. conceals the discovery and otherwise finishes the work.
c. investigates and reports the discovery to Frasier.
d. obtains restitution from the perpetrator without Frasier’s knowledge.
B5. Gert, an accountant, contracts to conduct an audit for Hailey. In performing the audit,
Gert fails to detect certain misconduct. Gert is most likely
a. liable if a normal audit would have revealed the misconduct.
b. liable if Gert issues a specifically qualified opinion.
c. not liable if Gert generally disclaims any liability.
d. not liable if the misconduct was due to Hailey’s negligence.
B6. Yves is an accountant charged with negligence by Zesty Soup Company, a client. Yves
may successfully defend against the claim if he can show that
a. scienter was lacking.
b. he complied with all International Financial Reporting Standards.
c. the negligence was not the proximate cause of the client’s losses.
d. the negligence was only contributory.
B7. Filtration Products, Inc., files a suit against Emmett, its former accountant, alleging
constructive fraud. Emmett may be held liable
a. if Filtration cannot prove actual fraud.
b. if Emmett was grossly negligent in the performance of his duties.
c. only if Emmett acted with fraudulent intent.
d. only if Emmett impersonated someone else who could be liable for fraud.
B8. Doug is an accountant whose clients include Everyday Products, Inc. (EPI). Under the
Ultramares rule, if Doug is negligent in his work for EPI, he could be liable to
a. EPI and any third party.
b. EPI and third parties who are foreseen users of his work.
c. EPI and third parties who are reasonably foreseeable users of his work.
d. EPI only.
B9. Hadley and Ilene are accountants who work together. Hadley and Ilene can limit their
potential liability for each other’s misconduct by organizing their business as
a. a limited liability partnership.
b. an unincorporated professional association.
c. an unofficial co-practice.
d. a sole proprietorship.
B10. Quibble Company’s liabilities exceed its assets. Quibble hires Roo & Slay, an
accounting firm, to prepare a balance sheet. Through Roo & Slay’s negligent
omissions, the sheet shows a net worth. Town Bank relies on the balance sheet to
make a loan to Quibble. When Quibble defaults, Town files a suit against Roo & Slay.
Under the Restatement rule, Roo & Slay is most likely
a. liable because Roo & Slay owed a duty of care to Quibble.
b. liable because Roo & Slay owed a duty to any foreseeable user.
c. liable if Roo & Slay knew that Town would rely on the balance sheet.
d. not liable because Roo & Slay and Town were not in privity.
B11. Tony is an accountant whose clients include U–All Company. If Tony is negligent in his
work for U-All, most courts would hold him liable to U-All and
a. any third party.
b. no third party.
c. third parties who are foreseen users of the work.
d. third parties who are reasonably foreseeable users of the work.
B12. Bruno is an accountant. Under the Sarbanes-Oxley Act of 2002, the degree of
government oversight over the public accounting practices of Bruno and other
accountants was
a. decreased.
b. increased.
c. eliminated.
d. unchanged.
B13. Lara, an accountant, conducts an audit of Microstuff, Inc. After the conclusion of the
audit, the working papers created in preparing the audit must be
a. disposed of immediately.
b. kept until the Public Company Accounting Oversight Board’s review.
c. maintained for seven years.
d. retained forever.
B14. Mona, an accountant, prepares for NuTech Corporation a financial statement that
omits a material fact. The financial statement is included in NuTech’s registration
statement, which Pam reads. Pam buys NuTech stock. Under Section 11 of the
Securities Act of 1933, for Mona to be liable for the omission, Pam must show that
a. Pam relied on the omission.
b. Pam suffered a loss on the stock.
c. Pam knew about the omission before making her purchase.
d. the omission had no causal connection to her loss.
B15. Nina, an accountant, prepares for Omni Corporation a financial statement that
misstates a material fact. The statement is included in Omni’s registration statement.
Pete, who is in privity with Nina, and Quinn, who is not, each buy Omni stock. Under
Section 11 of the Securities Act of 1933, Nina may be liable to
a. neither Pete nor Quinn.
b. Pete and Quinn.
c. Pete only.
d. Quinn only.
B16. Meri, an accountant, includes a false statement in a report for Novelty Paper
Products, Inc. (NPPI) that is filed with the Securities and Exchange Commission. When
Otho buys stock in NPPI and loses money on the investment, he files a suit against
Meri, alleging fraud under the 1934 Securities Exchange Act. To avoid liability, Meri
can show that she
a. intended to defraud NPPI, not Otho.
b. intended to profit on stock trades generally, not only with Otho.
c. is an otherwise competent accountant.
d. was not aware her statement was false.
B17. Beth is an accountant with Consumer Sales Corporation. Doral buys Consumer stock
and loses money on the investment. To recover from Beth under Section 10(b) of the
Securities Exchange Act of 1934 and SEC Rule 10b-5, Doral must prove
a. none of the choices.
b. fraud and reliance only.
c. fraud, reliance, and materiality only.
d. scienter, fraud, reliance, materiality, and causation only.
B18. Lacy is an accountant who prepares her clients’ tax returns. Muff is not an accountant,
but he also prepares tax returns for clients. Under the Internal Revenue Code, liability
for preparing a false return may be imposed on
a. Lacy and Muff.
b. Lacy only.
c. Muff only.
d. neither Lacy nor Muff.
B19. Jerzy is an accountant whose clients include Kopper Kettle Restaurants, Inc. For a
violation of securities laws, Jerzy may be subject to
a. comprehensive liability.
b. corporate liability.
c. criminal liability.
d. no liability.
B20. Bryce’s accountant is Caleb and his attorney is Delilah. All states protect, as privileged
information, Bryce’s communications with
a. Caleb and Delilah.
b. Caleb only.
c. Delilah only.
d. neither Caleb nor Delilah.
ESSAY QUESTIONS
B1. Dominique, a certified public accountant, provides accounting services to Eagle
Corporation. The services include preparing Eagle’s financial reports and issuing
opinion letters based on the reports. In 2008, Eagle falls into serious financial trouble,
but neither Dominique’s reports nor her opinion letters indicate this situation. Relying
on Dominique’s portrayal of Eagle’s financial situation, Eagle borrows a large sum of
money to build a new shipping facility. In lending Eagle the money, First National Bank
relies on Dominique’s opinion letter. Dominique is aware of this reliance. If Dominique
did not engage in intentional fraud but was negligent, what is her potential liability?
B2. Samantha is an accountant. Theo is an attorney. Which professional is most restricted
from disclosing her or his client’s communication?