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ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 47
PROFESSIONAL LIABILITY AND ACCOUNTABILITY
47-1A. Accountant’s liability to third parties
The court had to choose between the Ultramares rule and the Restatement (Second) of Torts in
dealing with the rights of third parties against accountants when there is no privity of contract.
47-2A. Auditors’ liability to third parties
The Supreme Court of Florida adopted the rule of Section 552 of the Restatement (Second) of
Torts, “under which accountants may be held liable in negligence to persons who are not in con-
tractual privity.” Under this rule, “it is not necessary that [the negligent party] should have any
particular person in mind as the intended, or even the probable, recipient of the information.
47-3A. Attorney’s duty of care
The trial court awarded Moores $12,000 in damages ($90,000 less $35,000 in fees and ex-
penses owed to Greenberg and less $43,000 recovered from the workers’ compensation in-
B-2 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 47
surer). Neither party was satisfied with the verdict, and the case was appealed. The U.S. Court
of Appeals for the First Circuit affirmed the trial court’s judgment. Greenberg had breached his
duty to Moores to inform him of the settlement offers and was thus liable to Moores for the dam-
47-4A. Accountant’s liability to third parties
Under Indiana law, the accounting firm and individual accountants were not held liable to Toro
for the alleged negligence. Before accountants may be held liable in negligence to noncontrac-
tual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must
47-5A. Attorney’s duty of care
Yes. The court held that James was negligent and that the sellers were entitled to recover
damages. To recover damages, the sellers had to prove that James owed a duty to them, that
47-6A. Accountants’ liability to third parties
The court denied Parente’s motion as to the negligent misrepresentation claim, under Section
552 of the Restatement (Second) of Torts. The court pointed out that “Section 552 provides
numerous illustrations concerning accountant liability for negligent misrepresentation to a party
47-7A. Accountants’ liability
On the ground of negligence for failure to discover the lack of tax payments, a jury returned a
verdict in favor of JTD (although the jury found that JTD was 38 percent comparatively negli-
gent, thus reducing the damages). Coopers appealed to a state intermediate appellate court,
47-8A. Accountants’ liability under Private Securities Litigation Reform Act
The SEC contended that Ohlhauser violated the Private Securities Litigation Reform Act
(PSLRA), because among other things, he was aware that Solucorp and Smart backdated the
license agreement to improperly recognize revenue, he failed to apprise the appropriate authori-
B-4 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 47
47-9A. Confidentiality and privilege
The attorney-client privilege protects the confidentiality of attorney-client communications. Under
this principle, an attorney cannot discuss a client’s case without the client’s permission or the
client’s waiver of this privilege, even by court order. The purpose for this protection is to encour-
47-10A. A QUESTION OF ETHICS
1. Under the Restatement (Second) of Torts, accountants are subject to liability for neg-
ligence not only to their clients but also to foreseen or known users of their reports of financial
statements. First National Bank of Bluefield was a known user because Crawford was aware
that the bank would use the financial statement in determining whether to make a loan to Erps.
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 47 B-5
2. Traditionally, privity of contract was required to hold an accountant liable for damages
in most circumstances. Gradually, to correct what was perceived to be an imbalance between
the rights of third parties and the rights of accountants, this requirement has given way. As indi-
cated above, under the Restatement (Second) of Torts, accountants can now be held liable for
3. This is the most liberal rule of accountants’ liability to third parties, and most courts do
not follow it. The rule has been criticized for tipping the scales of justice too far in favor of third
parties at the expense of accountants’ rights. It is one thing for an accountant to be liable to a
known third party or known (foreseeable) group of third parties, and quite another for an ac-
