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Business Law Chapter 47 Homework Noras Part Therefore Nora Can Show That

Page Count
9 pages
Word Count
5568 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
CHAPTER 47
PROFESSIONAL LIABILITY AND ACCOUNTABILITY
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
ETHICS TODAYCRITICAL THINKING
To what extent must attorneys reveal to their clients where confidential data are stored?
Typically, clients do not ask where their confidential data are stored. In the past, before
computer storage, clients usually assumed that the data were in the form of paper documents
stored on site. When the world migrated to computer storage, clients again usually assumed
that the data were stored on site. Today, few clients would be so naive as to think that a law or
accounting firm, particularly a large one, would store data on site. Whether clients should be
informed that confidential data are stored off site is not an easy question to answer. Moreover,
it is not clear that revealing such information to clients would reduce in any way a professionals’
responsibility if there is a breach of confidential data.
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 47.1LEGAL REASONING QUESTIONS
1. If the children had suffered no harm as a result of the attorney’s malpractice,
would the outcome of this case have been different? Why or why not? Yes. In fact, very
likely there would not be a case, because Guido sought to recover damages only for the
children (realizing that she had no chance of recovering because the Statute of Limitations had
expired). Because of the attorney’s malpractice, Guido was unable to proceed with the wrongful
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2. Why did the court affirm the dismissal of Guido’s individual claim but not the
claims that she had brought on behalf of the children? Guido’s claim was dismissed
because she had not filed the malpractice suit against the attorney until after the Statute of
3. If one of the children had not been a minor at the time of the father’s death, the
court would have dismissed his or her claims against Stern, even though he or she was
an intended beneficiary. Is it fair for the law to treat minors differently than other children
with regards to a statute of limitations? Why or why not? As you learned in the contracts
chapters, the law has always treated minors differently with respect to their legal capacity., In
the context of this case, the law generally allows a person’s status as a minor to toll (or
temporarily suspend) the statute of limitations period. That is why the court affirmed the
dismissal of the mother’s case, but allowed the children’s claims to go forward.
The rule suspending the statute of limitations for minors may sometimes seem unfair. For
example, if one of the children in this case had been eighteen and one had been sixteen, the
court would likely have dismissed the older child’s claims, but allowed the sixteen-year-old to
CASE 47.2CRITICAL THINKING
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
LEGAL ENVIRONMENT
Did Overton have a valid reason to sue DBI’s auditors? Why or why not? Yes, the
investors were dissatisfied with the result of their investment and looked for the most likely
scapegoat, which here was the accountant. Sometimes, one must simply suffer the
consequence of a bad turn o fate. No, because for economic and other progress, there must be
CASE 47.3CRITICAL THINKING
LEGAL ENVIRONMENT
How does the result in this case further the purpose of the attorney-client privilege? The
purpose of the attorney-client privilege is to foster confidence between an attorney and her client
that will lead to full and frank disclosure of all of the facts necessary to generate informed legal
advice. Without that confidence, if the communication can later be exposed to public scrutiny,
the client may be reluctant to disclose those facts.
In this case, Cynthia Baldwin, counsel for Pennsylvania State University (Penn State),
was precluded from testifying in future proceedings regarding privileged communications
between her and Gary Schultz, a retired vice president of Penn State (absent a waiver by
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WHAT IF THE FACTS WERE DIFFERENT?
Suppose that a hearing had been held on the question of the attorney-client privilege
before Baldwin testified. Would the result have been different? Most likely, yes.
As indicated by the opinion of the state intermediate appellate court in this case,
preliminary questions regarding the existence and extent of an attorney-client privilege are to be
decided by an appropriate court. At a hearing on the question of attorney-client privilege held
before the testimony of parties to whom the privilege may apply, questions regarding the extent
to which those parties could testify would be considered and answered, and thereby determined
by the court.
In fact, at the time of the actual events in this case, Pennsylvania Rules of Professional
Conduct and Pennsylvania Rules of Evidence provided for such a hearing. But, as noted in the
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Failing to detect material omissions
What constitutes negligence may vary according to judicial decision and state statutes, but
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
CHAPTER 47: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 5
2A. Applying the majority rule
The majority of courts apply the principles set out in the Restatement (Second) of Torts, which
hold an accountant liable for negligent acts that harm a third party if the accountant knew the
third party would use the accountant’s statements. It does not require that the third party be in
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
4A. Understating tax liability
Aiding or assisting in the preparation of a false tax return is a felony punishable by a fine of up to
$100,000 in the case of an individual ($500,000 in the case of a corporation) and imprisonment
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Only the largest publicly held companies should be subject to the Sarbanes-Oxley
Act. All U.S. publicly held companies, other than the very largest, are at a competitive
advantage compared to similar countries in Europe and Asia. Why? Because they have to
spend, in total, billions a year satisfying Sarbanes-Oxley reporting requirements. The U.S. used
to be the preferred country to list a foreign company on one of the stock exchanges. Today, we
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.
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ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
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
accountant knows that the bank will use the statement, the bank is a foreseeable user. A
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
fact that is not attributable to Nora’s fraud or negligence. Pat relies on the misstatement,
buys some of the securities, and suffers a loss. Can Nora be held liable to Pat? Explain.
No. In the circumstances described in the problem, the accountant will not be held liable to a
purchaser of the securities. No. In the circumstances described, the accountant will not be held
liable to a purchaser of the securities. Although an accountant may be liable under securities
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
47-1A. The Ultramares rule
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
47-2A. The Restatement rule
Assuming that the court has abandoned the Ultramares rule, it is likely that the accounting firm
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
47-3A. Accountants’ liability under Rule 10b-5
Harvey Helms may not bring a cause of action against the accountants of Bennett, Inc., under
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
47-4A. Accountant’s liability for audit
The appeals court vacated the order of the Comptroller. The court noted that external auditing of
the books only verifies the accuracy of the books. Thornton did not participate or engage in an
unsafe or unsound banking practice in violation of federal law. The accountants played no role
475A. Professional’s liability
Among the grounds for professional liability discussed in this chapter, DeYoung might file a suit
against Ruggerio for breach of contract, or fiduciary duty; malpractice (professional negligence);
and fraud. She might also file a criminal complaint against him for fraud. He has also violated
the attorney’s duty of care and other professional responsibility and ethical standards. By
surreptitiously diverting the children’s inheritance to his own account, Ruggerio failed to perform
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476A. Professional malpractice
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
477A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWERPotential liability to third
parties
KPMG is potentially liable to the hedge funds’ partners under the Restatement (Second) of
Torts. Under Section 552 of the Restatement, an auditor owes a duty to “persons for whose
benefit and guidance the accountant intends to supply . . . information.” In this case, KPMG
prepared annual reports on the hedge funds and addressed them to the funds’ “Partners.”
478A . Attorney’s duty of care
Yes, Herrick is liable for malpractice. An attorney owes a duty to provide a client with competent
and diligent representation. This requires the attorney to investigate and discover facts that
could materially affect the client’s legal rights. Normally, an attorney’s performance is expected
to be that of a reasonably competent general practitioner of ordinary skill, experience, and
capacity. When an attorney fails to exercise reasonable care and professional judgment, he or
she breaches the duty of care owed to the client and can be held liable for malpractice, or
professional negligence.
In this problem, the Rojases contracted to buy a house from the Paines. The house was
on property designated as Lot No. 8 on a subdivision map filed with the county. The Paines
47-9A. A QUESTION OF ETHICSLiability for negligence
(a) The court granted Macdonald Page’s motion to dismiss. Frank appealed to the
U.S. Court of Appeals for the First Circuit, which reversed the lower court’s judgment and
remanded the case for further proceedings to resolve the many factual questions and matters
of proof.”
The elements to a negligence claim are (1) the existence of a duty of care, (2) a breach
of that duty, (3) an injury to the plaintiff, and (4) a determination that the proximate cause of the
injury was the breach of the duty. Here, the appellate court recognized that the most critical
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.”
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at the Macdonald Page price. Instead, under the Shareholders’ Agreement, Frank was obligated
to accept Donna’s offer “only if and when he determined that he was unwilling to offer more
money per share to purchase her stock.” The court opined that Frank “had many options,
ranging from challenging the appraisal in any of a number of ways to offering Donna Holden the
same amount per share to offering her more per share.” Thus, Macdonald Page's valuation was
not and could not have been a cause, substantial or otherwise, of Frank’s loss.
(b) The court held that as Frank alleged the facts, his injury was foreseeable. “What
Macdonald Page's alleged misfeasance imposed on Wetmore was precisely the type of bind
that shareholders in a close corporation seek to avoid when they include buy-sell provisions in
their agreements. Protections afforded by buy-sell provisions that set a bidding floor are fully
meaningful only if the initial valuation of the company is performed accurately. Otherwise, as
here, the distortion of that base valuation skews the entire process.
(c) The court stated that Frank “was under no compulsion to enter the active bidding
process”—he did not have to sell his shares to Donna or to buy hers. The court recognized,
however, that he could have felt “unable to compete on a level playing field” with the Holdens if
he had acquired the total ownership of the company because “the Holdens would be free to
engage in the same business post-sale, with Holden having the operating experience that
Wetmore lacks.”
CHAPTER 47: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 11
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
4710A. Attorney-client privilege
(a) 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 encourage the client’s full disclosure to the attorney of the facts of the
client’s case.
(b) The confidentiality of attorney-client communications is protected from disclosure
without the client’s permission by the attorney-client privilege. But there is an exceptionthe
“crime-fraud” exception—under which a client who consults an attorney for advice that will help
the client commit fraud cannot avoid disclosure.
(c) In this problem, considering the evidence, the court should not order the disclosure
of the attorney-client communications relating to the Bertelsmann-Napster loan under the crime-
fraud exception. The plaintiffs’ evidence does not establish an intentional, material
misrepresentation aimed at the court. Litigation expenses could fall under the “general,
administrative and overhead expenses” clause in the loan documents. Even if the court
concluded that the written terms of the loan misrepresented the parties' agreement to allow

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