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CHAPTER 27: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 11
of an agreement between the firm’s client and its accountants and thus could not recover from the
accountants under a theory of negligent misrepresentation).
• Reisman v. KPMG Peat Marwick LLP, 57 Mass.App.Ct. 100, 781 N.E.2d 821 (2000) (an accounting firm
was not liable to shareholders, who acquired their stock in pooling-of-interests transactions, for negligent
misrepresentations in the corporation's Securities and Exchange Commission report, when the report
contained no signature, opinion, representation, or statement of the accounting firm, even though the firm
instructed the corporation on how to report financial transactions and reviewed, edited, and helped prepare
the information reported).
A. THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
This board, which reports to the Securities and Exchange Commission, oversees the audit of public
companies subject to securities laws to protect public investors and ensure that public accounting firms
comply with the provisions of the Act.
• It is unlawful to perform for an issuer both audit and nonaudit services, which include
whole or in part.
disclosure of their contents would breach the accountant’s fiduciary duty to the client.
• Accountants must keep working papers for as long as five years from the end of the fiscal period to
which the papers applied, subject to a possible fine and imprisonment.
1. Liability under Section 11
An accountant may be held civilly liable if he or she prepared any financial statements included in a
registration statement that “contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements therein not
misleading” [15 U.S.C. Section 77k(a)].This liability extends to anyone who acquires a security
• Due diligence means an accountant had, “after reasonable investigation, reasonable
grounds to believe and did believe, at the time such part of the registration statement
became effective, that the statements therein were true and that there was no omission
of a material fact required to be stated therein or necessary to make the statements
following defenses to Section 11 liability—
• There were no misstatements or omissions.
• Any misstatements or omissions were not of material facts.
• Any misstatements or omissions had no causal connection to the plaintiff’s loss.
CHAPTER 27: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 13
whole or in part.
Section 12(2) to accountants who aided and abetted the seller or the offeror of the securities
in violating Section 12(2) (that is, if the accountant knew, or should have known, that an untrue
statement or omission of material fact existed in the offer or sale).
• Penalties and sanctions include fines up to $10,000, imprisonment up to five years, injunc-
tions, and orders to refund profits.
B. LIABILITY UNDER THE SECURITIES EXCHANGE ACT OF 1934
Under Sections 18 and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities
and Exchange Commission, an accountant may be held liable for fraud. Here, however, an accountant
need not prove due diligence to escape liability.
• The statement affected the price of the security.
• He or she relied on the statement in making the purchase or sale and was not aware of its
inaccuracy.
statement was false and misleading.
2. Liability under Section 10(b) and Rule 10b-5
a. Prohibited Conduct
• Make an untrue statement of a material fact or omit to state a material fact necessary to
make statements made, in the circumstances, not misleading.
• Engage in an act, practice, or course of business that operates or would operate as a
fraud or deceit on a person in connection with the purchase or sale of a security.
• Liability may be imposed for fraudulent misstatements in written material filed with the
whole or in part.
CHAPTER 27: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 17
1. Criminal Violations of Securities Laws
willful violations—imprisonment of up to five years or a fine of up to $10,000 under the 1933 act and
up to $100,000 under the 1934 act.
2. Criminal Violations of Tax Laws
There is specific liability under the Internal Revenue Code—aiding or assisting in the preparation of
The confidentiality of attorney-client communications is protected by law, which confers a privilege on
such communications. An attorney may not discuss a client’s case with anyone—even under court
order—without the client’s permission.
B. ACCOUNTANT-CLIENT RELATIONSHIPS
18 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
COMMENT:
The lawyer is part of a judicial system charged with upholding the law. One of the lawyer’s functions is to
advise clients so that they avoid any violation of the law in the proper exercise of their rights.
The observance of the ethical obligation of a lawyer to hold inviolate confidential information of the client
not only facilitates the full development of facts essential to proper representation of the client but also
encourages people to seek early legal assistance.
Almost without exception, clients come to lawyers in order to determine what their rights are and what is,
in the maze of laws and regulations, deemed to be legal and correct. The common law recognizes that the
client’s confidences must be protected from disclosure. Based upon experience, lawyers know that almost all
clients follow the advice given, and the law is upheld.
A fundamental principle in the client-lawyer relationship is that the lawyer maintain confidentiality of
information relating to the representation. * * *
* * * *
A lawyer is impliedly authorized to make disclosures about a client when appropriate on carrying out the
representation, except to the extent that the client’s instructions or special circumstances limit that authority.
* * * *
Lawyers in a firm may, in the course of the firm’s practice, disclose to each other information relating to a
client of the firm, unless the client has instructed that particular information be confined to specified lawyers.
* * * *
The duty of confidentiality continues after the client-lawyer relationship has terminated.
TEACHING SUGGESTIONS
1. Impress on accounting students that criminal and civil liability has been imposed on auditors since the
early 1960s—merely complying with GAAS no longer guarantees protection. Those who choose to be ac-
countants must practice the profession with skill.
2. It might be pointed out that in a capitalist system it is essential that accurate information be disseminated
to avoid any wasting of assets. Partly for this reason, an independent check on an enterprise’s management
by auditors benefits everyone with an interest in the business.
3. Emphasize that investors and others rely on accountants’ reports and statements, and that is why ac-
curacy in those reports and statements is essential. Public policy demands it—it is the cornerstone of an ana-
lytical process. It might also be noted that accountants’ liability carries with it a cost, as is imposed by the lia-
bility of doctors and other professionals.
4. Since at least the movie “2001: A Space Odyssey” in 1968, it has been surmised that one day (possibly
within twenty years) computers will replace human intelligence. Today, however, a computer can only
whole or in part.
disclosure of their contents would breach the accountant’s fiduciary duty to the client.
• Accountants must keep working papers for as long as five years from the end of the fiscal period to
which the papers applied, subject to a possible fine and imprisonment.
1. Liability under Section 11
An accountant may be held civilly liable if he or she prepared any financial statements included in a
registration statement that “contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements therein not
misleading” [15 U.S.C. Section 77k(a)].This liability extends to anyone who acquires a security
• Due diligence means an accountant had, “after reasonable investigation, reasonable
grounds to believe and did believe, at the time such part of the registration statement
became effective, that the statements therein were true and that there was no omission
of a material fact required to be stated therein or necessary to make the statements
following defenses to Section 11 liability—
• There were no misstatements or omissions.
• Any misstatements or omissions were not of material facts.
• Any misstatements or omissions had no causal connection to the plaintiff’s loss.
CHAPTER 27: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 13
whole or in part.
Section 12(2) to accountants who aided and abetted the seller or the offeror of the securities
in violating Section 12(2) (that is, if the accountant knew, or should have known, that an untrue
statement or omission of material fact existed in the offer or sale).
• Penalties and sanctions include fines up to $10,000, imprisonment up to five years, injunc-
tions, and orders to refund profits.
B. LIABILITY UNDER THE SECURITIES EXCHANGE ACT OF 1934
Under Sections 18 and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities
and Exchange Commission, an accountant may be held liable for fraud. Here, however, an accountant
need not prove due diligence to escape liability.
• The statement affected the price of the security.
• He or she relied on the statement in making the purchase or sale and was not aware of its
inaccuracy.
statement was false and misleading.
2. Liability under Section 10(b) and Rule 10b-5
a. Prohibited Conduct
• Make an untrue statement of a material fact or omit to state a material fact necessary to
make statements made, in the circumstances, not misleading.
• Engage in an act, practice, or course of business that operates or would operate as a
fraud or deceit on a person in connection with the purchase or sale of a security.
• Liability may be imposed for fraudulent misstatements in written material filed with the
whole or in part.
CHAPTER 27: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 17
1. Criminal Violations of Securities Laws
willful violations—imprisonment of up to five years or a fine of up to $10,000 under the 1933 act and
up to $100,000 under the 1934 act.
2. Criminal Violations of Tax Laws
There is specific liability under the Internal Revenue Code—aiding or assisting in the preparation of
The confidentiality of attorney-client communications is protected by law, which confers a privilege on
such communications. An attorney may not discuss a client’s case with anyone—even under court
order—without the client’s permission.
B. ACCOUNTANT-CLIENT RELATIONSHIPS
18 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
COMMENT:
The lawyer is part of a judicial system charged with upholding the law. One of the lawyer’s functions is to
advise clients so that they avoid any violation of the law in the proper exercise of their rights.
The observance of the ethical obligation of a lawyer to hold inviolate confidential information of the client
not only facilitates the full development of facts essential to proper representation of the client but also
encourages people to seek early legal assistance.
Almost without exception, clients come to lawyers in order to determine what their rights are and what is,
in the maze of laws and regulations, deemed to be legal and correct. The common law recognizes that the
client’s confidences must be protected from disclosure. Based upon experience, lawyers know that almost all
clients follow the advice given, and the law is upheld.
A fundamental principle in the client-lawyer relationship is that the lawyer maintain confidentiality of
information relating to the representation. * * *
* * * *
A lawyer is impliedly authorized to make disclosures about a client when appropriate on carrying out the
representation, except to the extent that the client’s instructions or special circumstances limit that authority.
* * * *
Lawyers in a firm may, in the course of the firm’s practice, disclose to each other information relating to a
client of the firm, unless the client has instructed that particular information be confined to specified lawyers.
* * * *
The duty of confidentiality continues after the client-lawyer relationship has terminated.
TEACHING SUGGESTIONS
1. Impress on accounting students that criminal and civil liability has been imposed on auditors since the
early 1960s—merely complying with GAAS no longer guarantees protection. Those who choose to be ac-
countants must practice the profession with skill.
2. It might be pointed out that in a capitalist system it is essential that accurate information be disseminated
to avoid any wasting of assets. Partly for this reason, an independent check on an enterprise’s management
by auditors benefits everyone with an interest in the business.
3. Emphasize that investors and others rely on accountants’ reports and statements, and that is why ac-
curacy in those reports and statements is essential. Public policy demands it—it is the cornerstone of an ana-
lytical process. It might also be noted that accountants’ liability carries with it a cost, as is imposed by the lia-
bility of doctors and other professionals.
4. Since at least the movie “2001: A Space Odyssey” in 1968, it has been surmised that one day (possibly
within twenty years) computers will replace human intelligence. Today, however, a computer can only
