Chapter 32 - Professional Liability
b. Under the Cardoza Standard, unless the parties have actual privity, that is, privity
that results from a type one accounting contract, liability for negligence (aka
malpractice) does not exist—period.
c. Under the near-privity standard in regard to negligence, the plaintiff must show
that (a) the accountant knew that the reports would be shown to a third party, (b)
the accountant knew the identity of the third party and that he or she (or it?)
would rely on the report, and (c) the accountant’s conduct revealed that he or she
had knowledge of the third party’s reliance.
d. Under the near-privity plus or specifically foreseen third-party standard in regard
to negligence, most states have extended the near-privity rule even further,
holding that accountants are also liable to the limited class of third parties that is
specifically foreseen (not just actually known but specifically foreseen) when the
financial statement is drawn up.
e. Under the near-privity plus-2 or the reasonably foreseeable third-party standard in
regard to negligence, some courts have adopted a test that depends on whether the
plaintiff in the case was foreseeable (not just foreseen but foreseeable) as a
possible recipient of the accountant’s report.
f. Some courts may be said to use a type of Platonic Stabilizing Standard in regard
to negligence that balances the various liability standards and takes into account
the individualized nature of each case.
g. An accountant who prepares a fraudulent financial statement is liable to anyone
who can be reasonably foreseen as relying on that statement.
J. An Accountant’s Statutory Liability
1. Under certain circumstances the Securities Act of 1933 allows purchasers who have
lost money after buying corporate stock based on misleading or false registration
statements to sue the accountants who prepared the statements.
2. The Securities and Exchange Act of 1934 was designed to prevent the fraudulent
filing of various documents with the SEC and the fraudulent manipulation of the
3. Most states have also enacted statutes, referred to as blue sky laws, regulating
activities as they relate to the sale of stock.
II. The Liability of Architects and Attorneys (41-2)
A. The Liability of Architects
1. Under its police power, the state can regulate the conduct of architects.
2. An architect owes a duty to exercise due care and skill in carrying out professional
3. If a final version of a building differs from an original plan because of an error caused
by an architect’s failure to use due care and skill, the architect may have to reimburse
the client for any extra money spent to correct the error under the cost of repair rule.
4. If the design is defective and the structure is unusable for its originally intended
purpose, the court may declare that the architect owes the client the difference
between the market value of the building as it stands and the market value of the
5. If the architect has failed to exercise the appropriate standard of care resulting in
property damage or personal injury, then the architect may have to compensate the
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