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Negligence Liability of Accountants

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  • Category: Audit

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By law, accountants may be responsible for customers that hire them in various legal theories, including contract, fraud and negligence. Accountant malpractice happened when he or she violates the duty of reasonable care, knowledge, skills and judgment that he or she is due to a client or to the laws to provide auditing and other services. South Asset Management Co hired TWD, an accounting firm, to audit its financial statements for several years and then for an initial public offering of securities. The company understated its expenses and overstated its earnings by engaging in fraudulent capitalization practices for years. Reports showed that Southern Asset Management Co knew about these practices. TWD did not discover the true financial condition of South Asset Management; South Asset Management went bankrupt shortly after assurances that offer audits. Investors in South Asset Management Co sued TWD negligent audits. Accountant’s criminal liability

According to federal laws accountants can be criminally liable for violating certain federal and state securities laws and for other law violations. The Enron scandal, revealed in October 2001 led to the Sarbanes-Oxley Act of 2002 with new rules on auditor independence, Enron was attributed as the biggest audit failure at that time; the creation of the board of public company accounting oversight, corporate governance and certification requirements, whistleblower protection, statutes of limitations widespread and more severe penalties. Sarbanes-Oxley act also increased the accountability of auditing firms to remain unbiased and independent of their clients, meaning that accounts can be also prosecute for their clients crimes Issues

•Should accountants be liable for their clients?
•Accountant who unknowing/knowing causes to be made a false or misleading statement in any application, report, document, or registration statement should be responsible as well as their clients ? Summary

Yes, accountants are now liable for the clients; in today’s world the accounting profession has been damages with litigation primarily due to accountant’s greed, and by accounts not exercising the degree of care that an ordinarily prudent accountant would exercise. The investors may not recover on the basis of presumed or “indirect” reliance on the audit reports. Discussion

Accountants can be criminally liable for their clients. Like Enron, another prominent example of a corporate scandal involving accounting manipulation was Global Crossing. Global Crossing was created in 1997; their business was basic on telecommunications, but just like Enron their overnight success was driven in part by accounting fraud. The company accounting report base on “pro forma reporting”, a method of reporting financial information that is not based on the conventional standards of GAAP. Some states had adopted their laws about these claims; “Louisiana legislature adopted a claims review panel procedure involving ‘claims’ against certified public accountants and firms. ‘Claims’ as contemplated by the Sarbanes-Oxley Act are broadly defined as; (1) “Claim” means any cause of action against a certified public accountant or firm, regardless of the legal basis of the claim, including but not limited to tort, fraud, breach of contract, or any other legal basis, arising out of any engagement to provide professional services, including but not limited to the following:http://www.uslaw.com/library/Local_Law_Blogs/Professional_Liability_Claims

The ‘Standard of Care’ and Other Issues Involved in Claims against Accounts “Malpractice defined as; Professional misconduct or unreasonable lack of skill. This term is usually applied to such conduct by doctors, lawyers and accountants. Failure of one rendering professional services to exercise that degree of skill and learning commonly applied under all the circumstances in the community by the average prudent reputable member of the profession with the result of injury, loss or damage to the recipient of those services or to those entitled to rely upon them. It is any professional misconduct, unreasonable lack of skill or fidelity in professional or fiduciary duties, evil practice, or illegal or immoral conduct.” Not all courts hold accountants liable to foreseeable users of financial statements (Shore 2000). In 1983 New Jersey Supreme Court in the case of Rosenblum, Inc. v. Adler, facts of the case “After relying on the audited financial statements, the plaintiff found out that the financial statements were fraudulent and the stock has not value at all” The plaintiff sued the accountants,

The courts determined that in order to protect the public, (Gomez 2003) “accountants should have a duty to foreseeable users that receive and rely upon the accountant’s finished product” (Pacini, Ludwig, Hillison, Sinason and Higgins 2000). Goldberger v. State Board of Accountancy, – Accountant’s Liability; Appeals court upheld the decision of the State Board of Accountancy to revoke the CPA certificate of an accountant found by the Securities and Exchange Commission to have failed to perform due professional care in the audit of a public firm. The audit report endorsed financial statements falsely inflating company’s net earnings by $75 million. Decision affirmed; the revocation of this certificate of CPA was warranted as a disciplinary sanction for accounting negligence. — A.2d — (2003 WL 22318015, Comm. Ct., Pa., 2003) Board of Trustees of Community College Dist. No. 508 v. Coopers & Lybrand, N.E. (2002 WL 1751311, App. Ct., Ill., 2002).

Board of Trustees of Community College Dist. No. 508 v. Coopers & Lybrand Accountants Liable for Investment Losses Caused by Treasurer’s Bad Behavior; The case, Coopers & Lybrand audited the books of City Colleges no problems was found but according to court records months later after a second audit was needed because the investment practices of the college’s treasurer were in violation of college rules , the book revealed ‘After the investment fiasco was ended, the college sued Coopers for professional negligence and for breach of contract-for failure to detect and notify the board of illegal, inappropriate, and highly risky investments” The jury awarded the college $23 million, reduced by 45 percent for the college’s comparative negligence, and added $378,000 for breach of contract. Court records showed that the members of the board testified the different approach they would have taken if they knew what was going on to resolve the problem “had the auditors uncovered them and presented them to the board”. N.E. (2002 WL 1751311, App. Ct., Ill., 2002)

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