breach is material, CPA no Payment

defenses - Client failure to cooperate

Duty of care M Misrepresentation of material fact; M Misrepresentation of material fact;

Breach of that Duty S Intent to deceive (Scienter) R Recklessly

Caused Injury A A

Damages

I I

To Whom duty is owed

D Damages D Damages

Any person

Limited foreseeable Class of Persons

Ultramares Decision

*Privity

CPA Client

3rd part ( Named ) beneficiaries

CPA fails to act with reasonable care

*interstate commerc

L Suffered a loss L

A Acquired the stock Defenses available to auditors: 1933 1934 A

M M

1. Audit was performed with due Care Yes Yes

2. Misstatement was immaterial Yes Yes

3. Plaintiff had prior knowledge of misstatement Yes Yes

4. Plaintiff did not rely on information No Yes

5. Misstatement was not cause of loss Yes Yes

Plaintiff need not prove

Intent

Negligence

Reliance

Suffered a loss

Acquired the stock

Note The plaintiff justifiably relied on

the misrepresentation

F

R

A

U

D

Financial statement contained a

material misrepresentation or

material omission of fact

The misrepresentation was

made with scienter

Use of some means of

interstate commerce (e.g.,

telephone, Internet, mail, etc.).

Violation of StatuteLiability under 33 Act

LAM

Financial statement

contained a material

misrepresentation or

Liability under 34 Act

LAM + Fraud

CPA is to perform with the same skill and care

expected of ordinarily prudent

CPA followed applicable standards for the profession (

Eg GAAP & GAAS )

Following GAAS or GAAP is not an absolute defense

*Privity - only a party to the contract

can sue

CPA breaches the contract, the client or

third party beneficiary is entitled to

recover compensatory damages

Actual and justifiable reliance by plaintiff

on the misrepresentation

An intent to induce plaintiffs reliance on

the misrepresentation

MAIDR

Actual and justifiable reliance by

plaintiff on the

An intent to induce plaintiffs

reliance on the

* makes a statement without knowing

whether it is true or false

* makes a statement knowing the

statement was false

Liability under 33 Act Liability under 34 Act

Majority Rule

Elements

Minority Rule

Breach ( Ordinary Negligence )

Elements MAIDS Elements

Breach Of Contract Commision of Fraud Violation of Statute

CPA Legal Liabilities

Negligence Fraud

Construtive Fraud

(Gross Negligence)

Private Securities

Litigation Reform Act

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it is a crime Accountant is prohibited from showing the workpapers to anyone

without theclient's permission

Exception

Generally No State Privilege

Subpoenaed

CPA society voluntary quality control review

Defend a lawsuit brought by a client

Official investigation of the AICPAIstate trial board

GAAP/GAAS requires disclosure

Shown to a prospective purchaser of the

CPA's practice, & does not disclose the

confidential information; Note that while a

CPA may allow a prospective purchaser to

review confidential workpapers, the CPA

may not

Sarbanes-Oxley Act

To knowingly alter, destroy, falsify, a

document with the intent to impede a

federal investigation

keep all workpapers - public company

for at least 7 Yes

Defraud (Knowing commite Fraud) the

public in connection with a registered

security

Privileges

Generally No Accountant-

Client Privilege under

Federal Law

Exception : state courts and

agencies have no power to

force

Workpapers

REG 5.4.1.pdfREG 5.4.2.pdf