B-207
ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 48
PROFESSIONAL LIABILITY
AND ACCOUNTABILITY
48-1A. Accountant’s liability to third parties
(Chapter 48—Pages 938–939)
(2) a known third party (or parties) was intended to rely on the financial report, and (3) the accountant’s
conduct revealed that he or she knew of the third party’s reliance. The court chose Ultramares. Be-
48-2A. Auditors’ liability to third parties
(Chapter 48—Page 939)
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 contractual priv–
ity.” 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. * * * It is enough that the
maker of the representation intends it to reach and influence either a particular person or persons,
B-208 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 48
48-3A. Attorney’s duty of care
(Chapter 48—Pages 935–936)
The trial court awarded Moores $12,000 in damages ($90,000 less $35,000 in fees and expenses owed to
Greenberg and less $43,000 recovered from the workers’ compensation insurer). Neither party was sat-
isfied with the verdict, and the case was appealed. The U.S. Court of Appeals for the First Circuit af-
firmed the trial court’s judgment. Greenberg had breached his duty to Moores to inform him of the set-
tlement offers and was thus liable to Moores for the damages Moores suffered as a result—which the
court found to be $12,000 ($90,000 less the $35,000 owed to Greenberg and the $43,000 received as
workers’ compensation). The evidence “proved that while the third-party suit was in progress, the ship-
48-4A. Accountant’s liability to third parties
(Chapter 48—Pages 938–939)
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 noncontractual parties who
rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) The
accountants must have been aware that the financial reports were to be used for a particular purpose or
purposes (2) in the furtherance of which a known party was intended to rely, and (3) there must have
48-5A. Attorney’s duty of care
(Chapter 48—Pages 935–936)
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 he breached that duty,
B-210 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 48
48–6A. Accountants’ liability to third parties
(Chapter 48—Page 939)
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 in which such accountant is
not in privity.” For example, “A is negotiating with X Bank for a credit of $50,000” and “employs B &
Company, a firm of accountants, to make [an] audit,” but “nothing is said about supplying the infor-
mation for the guidance of X Bank only.” Instead, “A merely informs B & Company that he expects to
negotiate a bank loan, for $50,000 [and] requires the audit for the purposes of the loan.” X Bank fails,
48-7A. Accountants’ liability
(Chapter 48—Pages 933–935)
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 negligent, thus reducing the
damages). Coopers appealed to a state intermediate appellate court, which affirmed the judgment of
the lower court. The appellate court held that, as regards the negligence claim, “a reasonable person
could find that Coopers had breached its professional duty to JTD.” The court explained that “Coopers
had departed from generally accepted auditing standards by failing to properly supervise its in-
48-8A. Accountants’ liability under Private Securities Litigation Reform Act
(Chapter 48—Page 947)
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 im-
48-9A. Confidentiality and privilege
(Chapter 48—Page 949)
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 dis-
closure to the attorney of the facts of the client’s case. There is an exception—the “crime–fraud” excep-
tion—under which a client who consults an attorney for advice that will help the client commit fraud
cannot avoid disclosure.
In this case, citing the Barry e-mail and other evidence, the court ordered the disclosure of the
attorney-client communications relating to the Bertelsmann-Napster loan under the crime-fraud excep-
tion. Bertelsmann appealed to the U.S. Court of Appeals for the Ninth Circuit, which reversed this order
and remanded the case, holding that the plaintiffs did not prove the crime-fraud exception applied. The
court concluded that the plaintiffs’ evidence failed to establish “an intentional, material misrepresenta-
B-212 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 48
48-10A. A QUESTION OF ETHICS
1. Under the Restatement (Second) of Torts, accountants are subject to liability for negligence
not only to their clients but also to foreseen or known users of their reports of financial statements. First
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 indicated above, under the
Restatement (Second) of Torts, accountants can now be held liable for negligence to foreseen or known
users of their work products. Most courts have held that this standard is a “fair” and “reasonable” rule
regarding accountants’ liability to third parties. While holding accountants liable to third parties may act
to balance the scales of justice, you need to consider the fact that it creates a problem that did not exist
under the rule of privity: an accountant is now charged with a duty of care not only to clients but also to
third parties who the accountant knows will rely on his or her work product. It is possible that in ful-
filling the duty to a client, the accountant may breach his or her duty to a third party, and vice versa. For
example, if a client firm is anxious to borrow funds from a banking institution and asks the accountant to
put the best possible “dress” on its financial status in creating a financial statement, the accountant is
placed in a difficult position. How far can the accountant go in assisting the client’s wishes without in-
curring potential liability for damages to the third party? Alternatively, how far can the accountant go in
accommodating the third party without losing the client’s business? Although accountants’ liability to
third parties has led to perplexing problems for accountants, to date, society has deemed these conse-
quences to be an acceptable tradeoff for greater protection of third parties.
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