Business Law Chapter 48 Homework The Board found that Walsh improperly advertised

Chapter 48

Professional Liability and

Accountability

Case 48.1

Neb.,2009.

Walsh v. State ex rel. State Bd. of Public Accountancy of State

276 Neb. 1034, 759 N.W.2d 100

Supreme Court of Nebraska.

using a disclaimer to indicate that he was an “inactive registrant.” The Board reprimanded Walsh and placed him on

probation for 3 years, with the condition that he include the disclaimer along with any use of the CPA designation. The

Board also found that Walsh impersonated his brother-in-law to obtain insurance information, an act which qualified

as a “discreditable act” **104 under the Board’s rules. The Board reprimanded Walsh and placed him on probation for

a concurrent term of 3 months. The Lancaster County District Court affirmed the order of the Board. Walsh appeals.

In 2004, the Board was advised that Walsh was violating its rules and regulations by advertising that he was a CPA

without including a disclaimer that he was an inactive registrant. The yellow pages of a 2004 Omaha-area telephone

directory included a listing for “CPA MICHAEL P WALSH” under “Accountants-Certified Public.” The Board issued a

“cease and desist notice” to Walsh, ordering him to immediately stop use of the CPA designation in any manner. He

was directed to cancel the listing for future telephone directories and to send the Board a copy of a certified letter and

*1037 The Board filed a complaint against Walsh on March 6, 2006, for violation of the Board’s rules and regulations

in two respects. The complaint alleged that Walsh (1) held himself out to the public as a permitholder when he

advertised under the “Accountants-Certified Public” category in the telephone directory without including the

disclaimer that he was inactive and (2) engaged in a discreditable act when he impersonated Teiper to obtain

information from his insurance company.

registrant. As a sanction, the Board reprimanded Walsh and placed him on probation for 3 years with the condition

that he cease using “Certified Public Accountant” or “CPA” within 30 days on his business cards, letterhead,

advertising, tax returns, checks, or other written material provided to the public, unless it was also accompanied with

the disclaimer “inactive registrant.”

The Board also found that Walsh had committed a discreditable act when he lied to the insurance company and

(1980).

Concerning the discreditable acts charge, Walsh claims that the district court and the Board erred (1) in not finding

that 288 Neb. Admin. Code, ch. 5, § 007.01 (2005), is unconstitutionally vague; (2) in finding there was a sufficient

nexus between the practice of public accountancy and Walsh’s behavior for the Board to discipline him; and (3) in not

dismissing the discreditable acts charge when the Board denied Walsh his “Seventh Amendment” right to confront his

maintain a high standard of integrity and dignity in the profession of public accountancy and to govern the

administration and enforcement of the … Act.” § 1-112. See, also,

Zwygart, supra.

4 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

A permit to engage in the practice of public accountancy is issued by the Board to persons who hold certificates

issued by the Board and who have met experience requirements. § 1-136(1). Permits for certificate holders may be

Public Accountant” or “CPA” with his or her name, he or she shall also use “the disclaimer ‘Inactive Registrant’ in

parentheses immediately after the title or abbreviation.” 288 Neb. Admin. Code, ch. 7, § 003.01 (2007). After notice

and hearing, the Board may take *1040 disciplinary action against a permitholder for, among other reasons, violation

of a rule of professional conduct adopted and promulgated by the Board under the authority granted by the Act. § 1–

137(4). The types of disciplinary action available to the Board include reprimand, suspension, probation, placement of

limits on a permit or certificate, revocation of a permit or certificate, and imposition of a civil penalty and costs. See §

1-148.

1. ADVERTISING CHARGE

(a) Subject Matter Jurisdiction

[5] Walsh asserts that the Board did not have subject matter jurisdiction over him because the only service he

provided to clients was the completion of tax returns. This assignment of error has no merit. As noted earlier, the

Board is authorized to discipline the holders of certificates and permits who fail to comply with the technical or ethical

procedure for the adoption of rules and regulations that are “designed to implement, interpret, or *1041 make specific

the law enforced or administered” by an agency, Neb.Rev.Stat. § 84-901(2) (Reissue 2008).

[8] An administrative body has no power or authority other than that specifically conferred by statute or by

construction necessary to accomplish the plain purpose of the act.

Brunk v. Nebraska State Racing Comm.,

270 Neb.

186, 700 N.W.2d 594 (2005). We have often held, however, that an administrative agency may not employ its

inactive registrants and the requirement of the use of the disclaimer serve the fundamental purpose of the Act in

ensuring that the public is able to distinguish among those who are permitted to practice public accountancy and

those who are not. We agree.

[9] The rules adopted by the Board do not enlarge or modify the Act. The Board is authorized to promulgate rules

which allow it to meet the purpose of ensuring the competency of persons practicing public accountancy. There is no

conveying that a licensee holds a permit, including the use of titles or legends displayed in letterheads, business

cards, office doors, advertisements, and listings.

Walsh argues that his due process rights were violated because he was actually found to have violated 288 Neb.

Admin. Code, ch. 7, § 003.01, which provides: “Whenever using ‘Certified Public Accountant’ or ‘CPA’ with his or her

name, an inactive registrant shall use the disclaimer ‘Inactive Registrant’ in parentheses immediately after the title or

2. DISCREDITABLE ACT CHARGE

(a) Constitutionality

6 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

[13][14] Walsh argues that the district court erred in failing to find that 288 Neb. Admin. Code, ch. 5, § 007.01, is

unconstitutionally vague. Walsh offers no additional argument beyond merely stating that the “vagueness of the

professional conduct appropriate to establish and maintain a high **109 standard of integrity and dignity in the

profession of public accountancy.” § 1–112.

This court has stated that “like attorneys or medical professionals, [CPA’s] must demonstrate a high degree of moral

and ethical integrity.” *1044

Troshynski v. Nebraska State Bd. of Pub. Accountancy,

270 Neb. 347, 353, 701 N.W.2d

379, 385 (2005). We have also stated:

Zwygart,

273 Neb. at 417, 730 N.W.2d at 112.

The district court found that a person could not knowingly impersonate another and make false statements without

tainting the individual’s reputation as a CPA and the reputation of the profession as a whole. We agree with the district

court. Accountants are held to the standards established by the Board and must demonstrate moral and ethical

integrity in the same manner as attorneys and medical professionals. Walsh’s claim that there is no nexus between

CHAPTER 48: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 7

directed by the Board to cease and desist. Walsh also impersonated his brother-in-law when he called an insurance

company in order to obtain financial information. This action reflects adversely on the public accountancy profession,

which demands a high level of honesty and integrity.

This case comes to us for review of a judgment rendered by a district court pursuant to the Administrative Procedure

Case 48.2

Neb.,2010.

Perez v. Stern

279 Neb. 187, 777 N.W.2d 545

Supreme Court of Nebraska.

FN1. See, Neb.Rev.Stat. § 25-217 (Reissue 2008);

Vopalka v. Abraham,

260 Neb. 737, 619 N.W.2d 594 (2000).

Stern never contacted Guido, and eventually Guido hired a new attorney. Guido’s new attorney sent Stern a letter dated December

FN2. See Neb.Rev.Stat. § 25-222 (Reissue 2008).

The district court found that the malpractice claims accrued on May 7, 2004, when the wrongful death claim was dismissed. The

FN3. See Neb.Rev.Stat. § 30-810 (Reissue 2008).

ASSIGNMENTS OF ERROR

Guido assigns, consolidated and restated, that the district court erred in granting Stern’s motion for summary judgment on her

FN4.

In re Estate of Ronan,

277 Neb. 516, 763 N.W.2d 704 (2009).

FN5.

Harvey v. Nebraska Life & Health Ins. Guar. Assn.,

277 Neb. 757, 765 N.W.2d 206 (2009).

[3][4] Whether a legal duty exists for actionable negligence is a question of law dependent on the facts in a particular case.FN6

FN6.

Swanson v. Ptak,

268 Neb. 265, 682 N.W.2d 225 (2004).

FN7.

Id.

ANALYSIS

The issue in this case is whether Stern owed an independent duty to the children, as Martinez’ next of kin, to timely prosecute the

underlying wrongful death claim. Guido argues that Stern committed legal malpractice when Stern breached her duty to timely

FN9. See

Borley Storage & Transfer Co. v. Whitted,

265 Neb. 533, 657 N.W.2d 911 (2003).

[5][6] In Nebraska, a lawyer owes a duty to his or her client to use reasonable care and skill in the discharge of his or her duties,

FN10.

Swanson, supra

note 6.

FN11.

Id.; In re Estate of Wagner,

222 Neb. 699, 386 N.W.2d 448 (1986).

[7] But that does not end our analysis. Contrary to Stern’s suggestion, we have never said that privity is an absolute requirement of

FN12.

Swanson, supra

note 6.

FN13. See, e.g.,

DeLuna v. Burciaga,

223 Ill.2d 49, 857 N.E.2d 229, 306 Ill.Dec. 136 (2006);

Oxendine v. Overturf,

973

P.2d 417 (Utah 1999);

Leyba v. Whitley,

120 N.M. 768, 907 P.2d 172 (1995);

Brinkman v. Doughty,

140 Ohio App.3d 494,

748 N.E.2d 116 (2000);

Jenkins v. Wheeler,

69 N.C.App. 140, 316 S.E.2d 354 (1984);

Baer v. Broder,

86 A.D.2d 881, 447

N.Y.S.2d 538 (1982).

FN14. See, e.g.,

Swanson, supra

note 6;

Bauermeister v. McReynolds,

253 Neb. 554, 571 N.W.2d 79 (1997);

Gravel v.

Schmidt,

247 Neb. 404, 527 N.W.2d 199 (1995);

Earth Science Labs. v. Adkins & Wondra, P.C.,

246 Neb. 798, 523

FN15. See

Lucas v. Hamm,

56 Cal.2d 583, 364 P.2d 685, 15 Cal.Rptr. 821 (1961). See, also,

McIntosh Cty. Bank v.

Dorsey & Whitney,

745 N.W.2d 538 (Minn.2008);

Calvert v. Scharf,

217 W.Va. 684, 619 S.E.2d 197 (2005);

Watkins Trust

FN16. See,

McIntosh Cty. Bank, supra

note 15;

Calvert, supra

note 15;

Friske v. Hogan,

698 N.W.2d 526 (S.D.2005);

In

re Estate of Drwenski, supra

note 15;

Leak-Gilbert v. Fahle,

55 P.3d 1054 (Okla.2002);

MacMillan v. Scheffy,

147 N.H.

10 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

362, 787 A.2d 867 (2001);

Blair, supra

note 15;

Oxendine, supra

note 13;

Leyba, supra

note 13;

Donahue, supra

note 15;

FN17. See

Swanson, supra

note 6.

FN18. See, e.g.,

Hughes v. Omaha Pub. Power Dist.,

274 Neb. 13, 735 N.W.2d 793 (2007).

[11][12] Those balancing factors also support a number of important, specific limitations on liability in attorney malpractice cases.

FN20. See Neb. Ct. R. of Prof. Cond. § 3-501.2(b) (rev.2008).

FN21. See

Oxendine, supra

note 13.

FN23. See

Bowman, supra

note 22.

[14][15] Third, an attorney’s knowledge that the representation could injure or benefit an identified person will not, without more,

FN24.

Burger v. Pond,

224 Cal.App.3d 597, 273 Cal.Rptr. 709 (1990).

FN25. See,

Leak-Gilbert, supra

note 16;

Paradigm Ins. Co., supra

note 15;

Norton, supra

note 16.

FN26. See

Burger, supra

note 24.

[16][17] Finally, a duty to a third party will not be imposed if that duty would potentially conflict with the duty the attorney owes his

or her client, most often because the third party’s interests conflict with the client’s.FN27 In fact, an attorney is ethically obliged to

FN27. See,

Oxendine, supra

note 13;

Lamare, supra

note 22.

FN28. See Neb. Ct. R. of Prof. Cond. §§ 3-501.4 and 3-501.7.

FN29. See,

Oxendine, supra

note 13;

Rhone v. Bolden,

270 Ga.App. 712, 608 S.E.2d 22 (2004).

FN31. See

Rhode v. Adams,

288 Mont. 278, 957 P.2d 1124 (1998).

[18] Such concerns are not implicated here. We acknowledge that the general rule limiting an attorney’s duty to his or her client

FN32. See, e.g.,

In re Estate of Drwenski, supra

note 15;

Chem-Age Industries, Inc. v. Glover,

652 N.W.2d 756

(S.D.2002).

FN33. See,

McIntosh Cty. Bank, supra

note 15;

Noble v. Bruce,

349 Md. 730, 709 A.2d 1264 (1998).

[19][20] But if a third party is a direct beneficiary of an attorney’s retention, such that the end and aim of the attorney’s

FN34. See

McIntosh Cty. Bank, supra

note 15.

FN35. See,

id.; Blair, supra

note 15;

Donahue, supra

note 15.

We conclude that the well-settled principles set forth above provide appropriate guidance for us to determine whether the facts of

any given case establish a duty to a third party, and to evaluate the scope of that duty. These principles permit injured parties to

pursue claims where the basis for an attorney’s duty was clear, while preserving client authority and the interests and

FN36. See,

Lilyhorn, supra

note 14;

St. Mary’s Church, supra

note 14.

FN37. See

Swanson, supra

note 6.

FN38. See

Bauermeister, supra

note 14.

FN39. See

Landrigan, supra

note 14.

FN40. See

Ames Bank, supra

note 14.

The same cannot be said here. Courts to have considered the question have generally concluded that policy considerations weigh

FN41. See,

DeLuna, supra

note 13;

Oxendine, supra

note 13;

Leyba, supra

note 13;

Brinkman, supra

note 13;

Jenkins,

supra

note 13;

Baer, supra

note 13.

[21][22] In fact, under Nebraska’s wrongful death statute, there could be no other purpose to Stern’s representation. A wrongful

FN42. § 30–810.

FN43. See,

Oxendine, supra

note 13;

Leyba, supra

note 13.

FN44. See

id.

Furthermore, concerns weighing against a finding of duty are not present in this case. Stern’s potential duty to the children would

FN45. See

Leyba, supra

note 13.

In this case, we conclude that Stern owed a duty to the children, as direct and intended beneficiaries of her services, to

competently represent their interests. To hold otherwise would deny legal recourse to the children for whose benefit Stern was

hired in the first place. For those reasons, we find merit to Guido’s assignment of error and conclude that the district court erred in

Case 48.3

478 F.3d 479, Fed. Sec. L. Rep. P 94,160

David OVERTON and Jerome I. Kransdorf, Plaintiffs-Appellants,

v.

TODMAN & CO., CPAS, P.C. and Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari,

Defendants-Appellees.

York dismissed the federal claim with prejudice for failure to plead a viable theory of primary liability and, as a result,

dismissed the state law claims for lack of subject matter jurisdiction.

The precise issue on appeal is whether an auditor may incur primary liability under § 10(b) and Rule 10b-5 when the

auditor provides a certified opinion that is false or misleading when issued, subsequently learns or was reckless in not

learning that the earlier statement was false or misleading, knows or should know that potential investors are relying

Exchange (“NYSE”). Each year, Todman issued its “unqualified” opinion that DBI’s financial statements accurately

portrayed the company’s fiscal health.

Specifically, in its certification of DBI’s 2002 financial statement, Todman set forth that, “In our opinion, the financial

statements referred to above present fairly, in all material respects, the financial position of Direct Brokerage Inc. as

of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with

payroll taxes were DBI’s largest line item, the “nature and size of the financial misstatements relative to DBI’s size

demonstrates a complete reckless disregard in accurately stating the true financial position of DBI.”

More particularly, plaintiffs allege that Todman ignored five red flags that cast serious doubt on the accuracy of DBI’s

financial statements. First, in 1998 a Todman auditor noted “a large payroll tax payable at the end of the year” and

noted “that such an amount necessitated further analysis to determine if the liability was understated,” but no analysis

its own internal investigation that revealed that its former CFO failed to record the payroll tax liabilities on the

company’s books.

In addition to its internal investigation, DBI retained the forensic accounting firm Integrated Management Solutions to

evaluate Todman’s audits. Over several months, a representative of Integrated reviewed Todman’s work and

interviewed several Todman employees. The Integrated representative “concluded that [Todman’s] audits were

occurred.” Todman also knew of “DBI’s … efforts to secure new capital,” and that DBI’s “financial statements would

be provided to … potential investors.” Yet “Todman never took any steps to withdraw its certification or clean

opinion,” and never issued “any kind of directive or instruction to DBI not to disclose the financial statements.”

In 2003, DBI’s officers and directors infused roughly $950,000 into the company. In order to satisfy the remaining

obligations, however, they turned to outside investors. Plaintiff-appellant Overton was among those solicited to

alleges that by failing to correct its 2002 certified opinion under the circumstances described above, Todman made a

materially misleading misrepresentation and omission under § 10(b) of the Securities Exchange Act of 1934 and Rule

10b-5, and *483 thereby damaged Overton. In connection with this claim, Overton did not plead or rely on Todman’s

alleged recklessness in initially conducting its audit; Todman’s initial recklessness was alleged only in connection

with the state law claims. Defendants moved to dismiss Count I pursuant to for failure to state a claim upon which

in which we analyzed a claim of accountant aiding and abetting liability. The District Court then noted that after we

decided the Supreme Court held in , that § 10(b) does not authorize aiding and abetting liability. From this

sequence, the District Court reasoned that pursuant to an accountant’s failure to correct its certified opinion may

support only aiding and abetting liability, pursuant to there can be no such liability, and therefore, an accountant’s

failure to correct its certified opinion does not trigger liability at all. The District Court did not discuss the fact that we

entitle him to relief.” (internal quotation marks omitted).

II. The Duty to Correct

A fundamental principle of securities law is that before an individual becomes liable for his silence, he must have an

underlying duty to speak. . In a line of cases *484 beginning with , we have alluded to one such duty to speak: an

accountant’s duty, in certain circumstances, to correct its certified opinion. Despite our prior statements on the

limited this duty to only those statements that the accountant actually prepared and certified. Since the information

that the plaintiffs claimed the accountant should have disclosed-the conspiracy-was not a

correction

of anything

in the

certified statements,

the auditor had no duty to disclose it, and the claim was dismissed. Because the plaintiff had

charged the accountant as an aider and abettor only, we had no opportunity or reason to consider whether primary

liability could arise from a violation of the duty to correct, and did not reach that issue. (noting that the complaint

are always free from liability under the securities Acts. Any person or entity, including a lawyer, accountant, or bank,

who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of

securities relies may be liable as a primary violator under 10b-5, assuming

all

of the requirements for primary liability

under Rule 10b-5 are met.

.

Shortly thereafter, in , we again addressed an accountant’s duty to correct a certified statement, this time within the

The concept of a duty to disclose appears to stem from the extent of reliance on the accountant’s work made by the

public and the expectations of the public. Clearly, in a situation in which the accountant “gives an opinion or certifies

statements” about a company-statements which the accountant later discovers may not have been accurate …-then

the accountant has a duty to disclose the fraud to the public …. Conversely, 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

Nevertheless, the complaint at issue in failed to plead either basis for the duty to disclose; indeed, the complaint

alleged only that the accountant “prepar[ed] the financial projections that were later included in the principal

CHAPTER 48: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 17

defendants’ offering memoranda.” Further, those projections did not contain any misstatement. (“[T]here exists no

allegation that the projections misrepresented any financial fact.”). Because the accountant had neither issued a

that in the absence of a misstatement by the accountant, the accountant could not be primarily liable. We affirmed

on this ground.

In an effort to save her case, plaintiff pointed to a second document that the accountant itself had issued: its 1995

Report of Independent Auditors, which BT had included in its initial public offering prospectus. On appeal, plaintiff

urged-for the first time-that the accountant could be primarily liable because by 1996 it had “discovered facts tending

omission) in 1996 as a result of its duty and subsequent failure to correct” its 1995 report). We further noted other

deficiencies in the amended complaint: it failed to allege that the accountant “knew or was reckless in not knowing” at

the time it issued its report that the report “contained false financial information, [or] that the market or those who

purchased BT’s stock … relied on the 1995 report.” Since the amended complaint failed to allege a theory of primary

liability predicated on the accountant’s failure to correct its 1995 report, we had no basis to reach the issue.