978-1285770178 Solution Manual BL ComLaw 1e SM-Ch27

subject Type Homework Help
subject Pages 17
subject Words 5023
subject Authors Roger LeRoy Miller

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in whole or in part.
page-pf2
in whole or in part.
page-pf3
in whole or in part.
page-pf4
4 UNIT SIX: GOVERNMENT REGULATION
in whole or in part.
CASE 27.3QUESTIONS (PAGE 532)
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.”
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.
complying with GAAP and acting in good faith are defenses only to a prima facie case and do
not excuse liability in every case. Shuebke could argue that her mistake was not due to
negligence, and a court might or might not agree with her, yet conforming to GAAP and acting in
good faith are not failsafe defenses.
question is whether Chase prepared the audit, knowing that Superior would ultimately rely on it.
If so, Chase could be liable under the Restatement rule.
page-pf5
CHAPTER 27: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 5
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
3A. Recovering under Section 10(b) and Rule 10b-5
To be liable for fraud under the 1934 act and Rule 10b-5, an accountant must make untrue
statements or omissions of material facts that render financial statements misleading in
connection with a purchase or sale of securities. Chase clearly did this, failing to conform to
GAAP and preparing a statement that was materially misleading. The 1934 act also requires
that the plaintiff prove intent (scienter) to commit the fraudulent or deceptive act. Superior is able
to do this, having come into possession of an email exchange between Chase and Regal CEO
Buddy Gantry. Therefore, Superior meets all the requirements and can recover damages under
understatement of tax liability. For a willful understatement, the penalty may be $1,000.
Additional penalties of up to $10,000 may apply for aiding and abetting an understatement.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
are no longer in this formerly enviable position because foreign companies don’t want to pay the
huge cost of complying with the Sarbanes-Oxley Act.
Accounting scandals occur not only with the largest U.S. publicly held companies, but
with smaller ones, too. If we exempted all but this country’s largest publicly held corporations
from Sarbanes-Oxley, we would see increased accounting irregularities throughout the
1A. Dave, an accountant, prepares a financial statement for Excel Company, a client,
knowing that Excel will use the statement to obtain a loan from First National Bank. Dave
makes negligent omissions in the statement that result in a loss to the bank. Can the
bank successfully sue Dave? Why or why not? Yes. In these circumstances, when the
page-pf6
6 UNIT SIX: GOVERNMENT REGULATION
in whole or in part.
accountant knows that the bank will use the statement, the bank is a foreseeable user. A
for negligence.
2A. Nora, an accountant, prepares a financial statement as part of a registration
statement that Omega, Inc., files with the Securities and Exchange Commission before
making a public offering of securities. The statement contains a misstatement of material
diligence is a defense to liability. Due diligence requires an accountant to conduct a reasonable
investigation and have reason to believe that the financial statements were true at the time. The
facts say that the misstatement of material fact in Omega’s financial statement was not
attributable to any fraud or negligence on Nora’s part. Therefore, Nora can show that she used
due diligence and will not be held liable to Pat.
Patterson’s decision to become creative in his accounting, and hence to abandon generally
accepted accounting principles, will be considered prima facie evidence of negligence on his
part. Under the traditional Ultramares rule, an accountant did not owe any duty to a third person
with whom he or she had no direct contractual relationship. Thus, Tucker could not hold
Patterson liable for negligence because there was no direct contractual relationship between the
of Goldman, Walters, Johnson & Co. will be held liable to Happydays State Bank for negligent
preparation of financial statements. There are various policy reasons for holding accountants
liable to third parties even in the absence of privity. The potential liability would make accoun-
tants more careful in the preparation of financial statements. Moreover, in some situations the
accountants may be the only solvent defendants, and hence, unless liability is imposed on
page-pf7
page-pf8
8 UNIT SIX: GOVERNMENT REGULATION
in whole or in part.
276A. Professional malpractice
(Chapter 27Page 521)
The trial court rejected these claims and the appeals court affirmed. Since the matter concerned
malpractice in litigation, the standard is the same as is applied in cases of legal malpractice. To
prevail on a claim of professional malpractice, a client must show that: (1) he employed an
attorney; (2) the attorney failed to exercise ordinary care, skill, and diligence; and (3) the
attorney’s negligence was the proximate cause of damage to client. Guerrero’s affidavit was
insufficient to show that alleged negligence by McDonald, who represented him in the Tax Court
challenging corporate tax rulings of the IRS, proximately caused, as an element of the
choice of trial tactics or strategy or the good faith exercise of professional judgment.
277A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWERPotential liability to third
parties
KPMG is potentially liable to the hedge funds’ partners under the Restatement (Second) of
accepted accounting principles. As a result, they lost millions of dollars, which exposes KPMG
to possible liability under Section 552.
27-8A. A QUESTION OF ETHICSLiability for negligence
(a) The court granted Macdonald Page’s motion to dismiss. Frank appealed to the
element in Frank’s case was causation—that is, that Macdonald Page's negligent valuation
caused him to receive less than fair market value for his shares.”
For a negligent act “to constitute proximate cause, the act or omission must be a
substantial factor in bringing about the harm and the injury incurred must have been a
reasonably foreseeable consequence” or a direct result. “The mere possibility of such causation
page-pf9
in whole or in part.
page-pfa
in whole or in part.
in whole or in part.
in whole or in part.
4 UNIT SIX: GOVERNMENT REGULATION
in whole or in part.
CASE 27.3QUESTIONS (PAGE 532)
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.”
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.
complying with GAAP and acting in good faith are defenses only to a prima facie case and do
not excuse liability in every case. Shuebke could argue that her mistake was not due to
negligence, and a court might or might not agree with her, yet conforming to GAAP and acting in
good faith are not failsafe defenses.
question is whether Chase prepared the audit, knowing that Superior would ultimately rely on it.
If so, Chase could be liable under the Restatement rule.
CHAPTER 27: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 5
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
3A. Recovering under Section 10(b) and Rule 10b-5
To be liable for fraud under the 1934 act and Rule 10b-5, an accountant must make untrue
statements or omissions of material facts that render financial statements misleading in
connection with a purchase or sale of securities. Chase clearly did this, failing to conform to
GAAP and preparing a statement that was materially misleading. The 1934 act also requires
that the plaintiff prove intent (scienter) to commit the fraudulent or deceptive act. Superior is able
to do this, having come into possession of an email exchange between Chase and Regal CEO
Buddy Gantry. Therefore, Superior meets all the requirements and can recover damages under
understatement of tax liability. For a willful understatement, the penalty may be $1,000.
Additional penalties of up to $10,000 may apply for aiding and abetting an understatement.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
are no longer in this formerly enviable position because foreign companies don’t want to pay the
huge cost of complying with the Sarbanes-Oxley Act.
Accounting scandals occur not only with the largest U.S. publicly held companies, but
with smaller ones, too. If we exempted all but this country’s largest publicly held corporations
from Sarbanes-Oxley, we would see increased accounting irregularities throughout the
1A. Dave, an accountant, prepares a financial statement for Excel Company, a client,
knowing that Excel will use the statement to obtain a loan from First National Bank. Dave
makes negligent omissions in the statement that result in a loss to the bank. Can the
bank successfully sue Dave? Why or why not? Yes. In these circumstances, when the
6 UNIT SIX: GOVERNMENT REGULATION
in whole or in part.
accountant knows that the bank will use the statement, the bank is a foreseeable user. A
for negligence.
2A. Nora, an accountant, prepares a financial statement as part of a registration
statement that Omega, Inc., files with the Securities and Exchange Commission before
making a public offering of securities. The statement contains a misstatement of material
diligence is a defense to liability. Due diligence requires an accountant to conduct a reasonable
investigation and have reason to believe that the financial statements were true at the time. The
facts say that the misstatement of material fact in Omega’s financial statement was not
attributable to any fraud or negligence on Nora’s part. Therefore, Nora can show that she used
due diligence and will not be held liable to Pat.
Patterson’s decision to become creative in his accounting, and hence to abandon generally
accepted accounting principles, will be considered prima facie evidence of negligence on his
part. Under the traditional Ultramares rule, an accountant did not owe any duty to a third person
with whom he or she had no direct contractual relationship. Thus, Tucker could not hold
Patterson liable for negligence because there was no direct contractual relationship between the
of Goldman, Walters, Johnson & Co. will be held liable to Happydays State Bank for negligent
preparation of financial statements. There are various policy reasons for holding accountants
liable to third parties even in the absence of privity. The potential liability would make accoun-
tants more careful in the preparation of financial statements. Moreover, in some situations the
accountants may be the only solvent defendants, and hence, unless liability is imposed on
8 UNIT SIX: GOVERNMENT REGULATION
in whole or in part.
276A. Professional malpractice
(Chapter 27Page 521)
The trial court rejected these claims and the appeals court affirmed. Since the matter concerned
malpractice in litigation, the standard is the same as is applied in cases of legal malpractice. To
prevail on a claim of professional malpractice, a client must show that: (1) he employed an
attorney; (2) the attorney failed to exercise ordinary care, skill, and diligence; and (3) the
attorney’s negligence was the proximate cause of damage to client. Guerrero’s affidavit was
insufficient to show that alleged negligence by McDonald, who represented him in the Tax Court
challenging corporate tax rulings of the IRS, proximately caused, as an element of the
choice of trial tactics or strategy or the good faith exercise of professional judgment.
277A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWERPotential liability to third
parties
KPMG is potentially liable to the hedge funds’ partners under the Restatement (Second) of
accepted accounting principles. As a result, they lost millions of dollars, which exposes KPMG
to possible liability under Section 552.
27-8A. A QUESTION OF ETHICSLiability for negligence
(a) The court granted Macdonald Page’s motion to dismiss. Frank appealed to the
element in Frank’s case was causation—that is, that Macdonald Page's negligent valuation
caused him to receive less than fair market value for his shares.”
For a negligent act “to constitute proximate cause, the act or omission must be a
substantial factor in bringing about the harm and the injury incurred must have been a
reasonably foreseeable consequence” or a direct result. “The mere possibility of such causation
in whole or in part.
in whole or in part.

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