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Accountants' Liability

by Dan L. Goldwasser, M Thomas Arnold

Last Updated: November 2012

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ISBN Number: 0872240959
Page Count: 830
Number of Volumes: 1
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TABLE OF AUTHORITIES

The liability exposure of accountants has widened dramatically over the past decade in the wake of numerous front-page corporate and financial scandals.

PLI’s Accountants’ Liability has been the reliable and readable resource that accountants have turned to for guidance on how they can meet their professional responsibilities, comply with relevant rules, and avoid the increased number of legal land mines. Accountants see clearly the trouble they can get into when they deal with financial statements, fail to perform contracted services, fail to uncover clients’ wrongful actions, act as business consultants, offer tax-related services, misstate material facts, and fail to follow professional standards.

Accountants’ Liability also provides attorneys with the legal, strategic, and tactical knowledge they need to prove (or successfully defend against) claims against accountants such as breach of contract, breach of fiduciary duty, negligence, securities claim fraud, common law fraud, civil RICO actions, as well as practice and ethical violations.

Updated at least once a year, Accountants’ Liability is an essential guide for accountants, auditors, and attorneys, as well as a useful reference for insurance professionals.


	Chapter 1:	Introduction
§ 1:1 : Historical Perspective1-2 § 1:2 : Services Commonly Performed by Accountants1-10 § 1:2.1 : Financial Statement Services1-10 § 1:2.2 : Tax Services1-14 § 1:2.3 : Business Consulting Services1-16 [A] : Feasibility Studies1-16 [B] : Acquisition Reviews1-17 [C] : Financial Systems Advice (IT Consulting)1-17 [D] : Financial Consulting Services1-18 [E] : Pension and Employee Benefit Consultation Services1-19 [F] : Internal Audit Services1-19 [G] : Other Consultation Services1-20 § 1:2.4 : Individual Advisory Services1-21 § 1:2.5 : Litigation Support Services1-22 § 1:2.6 : Fraud Investigations1-23 § 1:3 : Situations Which Give Rise to Accountants’ Liability1-24 § 1:4 : Claims Commonly Asserted Against Accountants1-27 § 1:4.1 : Negligence Claims1-27 § 1:4.2 : Breach of Contract Claims1-29 § 1:4.3 : Common Law Fraud Claims1-30 § 1:4.4 : Breach of Fiduciary Duty Claims1-31 § 1:4.5 : State Securities Law Claims1-32 § 1:4.6 : Federal Securities Law Claims1-33 [A] : Section 10(b) Claims1-34 [B] : Section 11 Claims1-37 [C] : Section 12 Claims1-37 [D] : Section 14 Claims1-38 § 1:4.7 : RICO Claims1-39 § 1:4.8 : Secondary Liability1-40 [A] : Controlling Person1-41 [B] : Respondeat Superior1-41 [C] : Conspiracy1-42 [D] : Agency1-43 § 1:4.9 : State Consumer Protection Laws1-44
	Chapter 2:	Standards of the Accounting Profession; And Appendices 2A-2B
§ 2:1 : Introduction2-1 § 2:2 : Governance of the Profession2-2 § 2:3 : Standards of Professional Conduct2-3 § 2:3.1 : Standards of Practice2-4 § 2:3.2 : Ethical Standards2-5 § 2:4 : Accounting Standards2-11 § 2:5 : Auditing Standards2-17 § 2:5.1 : Auditor Independence2-21 § 2:6 : Standards for Tax Practice2-28 § 2:7 : Other Professional Standards2-30 § 2:8 : Conclusion2-32 Appendix 2A : Uniform Accountancy Act and Uniform Accountancy Act Model Rules, Fifth EditionApp. 2A-1 Appendix 2B : Comparison of State Accountancy Laws with the Uniform Accountancy ActApp. 2B-1
	Chapter 3:	Breach of Contract
§ 3:1 : General3-1 § 3:2 : Elements of Breach of Contract Claim3-3 § 3:2.1 : Existence and Terms of the Agreement3-4 [A] : In General3-4 [B] : Engagement Letter3-5 [C] : Other Evidence3-7 [D] : Standards of Accounting Profession3-9 § 3:2.2 : Breach of Agreement3-10 [A] : Failure to Perform Services3-10 [B] : Failure to Perform in a Timely Manner3-12 [C] : Failure to Perform in a Satisfactory Manner or to Accomplish Stated Goal3-12 [D] : Failure to Comply with Professional Standards3-13 § 3:2.3 : Causal Relationship3-15 § 3:2.4 : Damages3-18 [A] : In General3-18 [B] : Cost to Complete Performance or Remedy Defects3-19 [C] : Loss in Value of the Performance3-20 [D] : Consequential Damages3-21 § 3:2.5 : Restitution of Accountant’s Compensation3-22 § 3:2.6 : Prejudgment Interest3-23 § 3:3 : Affirmative Defenses3-23 § 3:3.1 : Statute of Limitations3-23 § 3:3.2 : Statute of Frauds3-25 § 3:3.3 : Limitation on Liability Provisions3-26 § 3:4 : Third-Party Beneficiaries3-27
	Chapter 4:	Negligence
§ 4:1 : General4-2 § 4:1.1 : State Law Claim4-2 § 4:1.2 : Types of Cases4-3 § 4:2 : Elements of Claim4-5 § 4:2.1 : Duty of Due Care Owed to Plaintiff4-7 [A] : Privity Rule4-10 [B] : Near-Privity Standard4-12 [C] : Restatement Standard4-20 [C][1] : In General4-20 [C][2] : Rationale for Standard4-24 [C][3] : Cases Applying the Standard4-25 [C][4] : Impact of Restatement Standard4-30 [D] : Foreseeability Standard4-31 [D][1] : In General4-31 [D][2] : The Bily Case: California Rejects the Foreseeability Approach4-35 [E] : Statutory Limitations of Duty4-36 § 4:2.2 : Nature of Duty Owed4-45 [A] : Use of Care of Reasonably Prudent Accountant4-45 [B] : Duty to Disclose4-47 [C] : Contractual Limitations of Duty4-48 § 4:2.3 : Breach of Duty4-50 § 4:2.4 : Proximate Cause4-51 [A] : In General4-51 [B] : Negligent Misrepresentation Cases4-56 [B][1] : Transaction Causation (Reliance)4-57 [B][2] : Loss (Legal) Causation4-60 [B][3] : Reasonableness of Reliance; Materiality4-61 [C] : Intervening Forces and Superseding Causes4-63 § 4:2.5 : Damages4-65 [A] : In General4-65 [A][1] : Compensatory4-66 [A][2] : Prejudgment Interest4-68 [A][3] : Reduction for Effect of Taxation or for Tax Benefits Received4-69 [A][4] : Punitive Damages4-70 [B] : Items of Damages4-71 [B][1] : Money Lost or Stolen4-71 [B][2] : Cost of Restating Financial Statements or Tax Returns or of Proper Audit4-71 [B][3] : Lost Profits, Injury to Reputation, Etc.4-72 [B][4] : Continuing Losses4-73 [B][5] : Fines and Penalties4-73 [B][6] : Adverse Tax Consequences and Interest4-74 [B][7] : Overpayment for Investments4-75 [B][8] : Cost to Restore Investment Position4-76 [B][9] : Attorney’s Fees and Expenses of Litigation4-76 [B][10] : Emotional Harm4-76 [B][11] : Deepening Insolvency4-77 § 4:3 : Affirmative Defenses4-80 § 4:3.1 : Statute of Limitations4-80 [A] : Continuous Representation Doctrine4-88 § 4:3.2 : Plaintiff’s Negligence4-92 [A] : Contributory Negligence4-92 [B] : Comparative Negligence4-95 [C] : In Pari Delicto Defense4-100 § 4:3.3 : Failure to File Certificate of Review or Affidavit4-110 § 4:4 : Joint and Several Versus Proportional Liability4-122 § 4:5 : Contribution and Indemnity4-124
	Chapter 5:	Fraud
§ 5:1 : General5-2 § 5:1.1 : Sources of Claim5-3 [A] : Federal Law5-3 [B] : State Common Law5-5 § 5:1.2 : Preemption of State Court Class Actions Alleging Securities Fraud5-6 § 5:1.3 : Types of Claims Encompassed5-12 § 5:2 : Elements5-13 § 5:2.1 : Purchaser/Seller Requirement5-24 [A] : “In Connection With”5-25 [B] : Purchase or Sale5-29 [C] : Of a Security5-32 [D] : Through an Interstate Instrumentality5-35 § 5:2.2 : Misstatement or Omission to State Fact with Duty to Disclose5-35 [A] : Misstatements5-36 [B] : Omissions5-38 [C] : Trading without Disclosing Nonpublic Information5-45 § 5:2.3 : Materiality and the “Bespeaks Caution” Doctrine5-47 § 5:2.4 : Scienter5-55 § 5:2.5 : Reliance (Transaction Causation)5-63 [A] : Actual Reliance5-63 [B] : Imputed Reliance5-68 [B][1] : Material Omissions5-68 [B][2] : Fraud-on-the-Market5-69 [B][3] : Fraud-Created-the-Market5-74 [B][4] : Fraud-on-the-Regulatory-Process5-76 § 5:2.6 : Proximate (Loss) Causation5-77 [A] : The Requirement5-77 [B] : Some Possible Applications5-86 [C] : Distinguishing Loss from Damages5-87 [D] : Loss Causation in Common Law Fraud Cases5-88 § 5:3 : Affirmative Defenses5-89 § 5:3.1 : Statute of Limitations5-89 [A] : Federal Securities Law5-89 [B] : Common Law Fraud5-93 § 5:3.2 : Plaintiff’s Lack of Due Diligence5-94 [A] : Extent to Which Applicable5-94 [B] : In Pari Delicto5-94 § 5:4 : Damages5-95 § 5:4.1 : In General5-95 § 5:4.2 : Out-of-Pocket5-96 § 5:4.3 : Rescissory Damages5-101 § 5:4.4 : Benefit-of-the-Bargain5-103 § 5:4.5 : Punitive Damages5-104 § 5:4.6 : Tax Benefit Rule5-110 § 5:4.7 : Prejudgment Interest5-112 § 5:5 : Rescission5-113 § 5:6 : Proportionate Liability5-113 § 5:7 : Contribution5-117 § 5:8 : Secondary or Vicarious Liability5-120 § 5:8.1 : In General5-120 § 5:8.2 : Aiding and Abetting; the Central Bank Decision5-120 [A] : Before Central Bank5-120 [B] : After Central Bank5-122 [C] : Common Law Cases5-133 § 5:8.3 : Controlling Person5-135 § 5:8.4 : Conspiracy5-138 § 5:8.5 : Respondeat Superior5-141 § 5:9 : Note on Deceptive Trade Practice Statutes5-143
	Chapter 6:	RICO
§ 6:1 : Introduction6-1 § 6:2 : Civil Damage Remedy6-2 § 6:2.1 : In General6-5 § 6:2.2 : Racketeering Activity6-6 § 6:2.3 : Pattern of Racketeering Activity6-10 § 6:2.4 : Enterprise6-14 § 6:2.5 : Participation in or Control of: The Reves Decision6-16 § 6:2.6 : Conspiracy6-21 § 6:3 : Standing6-22 § 6:4 : Causal Link6-26 § 6:5 : Damages6-30 § 6:6 : Defenses6-33 § 6:7 : RICO Reform Efforts6-37
	Chapter 7:	Breach of Fiduciary Duty
§ 7:1 : General7-2 § 7:1.1 : Potential Advantages to Bringing a Fiduciary Duty Claim7-2 § 7:1.2 : Fiduciary Relationship Defined7-4 § 7:1.3 : Circumstances in Which Accountant Is Not a Fiduciary7-5 § 7:1.4 : Circumstances in Which Accountant Is a Fiduciary7-8 [A] : Renders Personal Financial, Investment, or Tax Advice7-9 [B] : Manages Client Assets or Business7-11 [C] : ERISA Fiduciary7-12 § 7:1.5 : Duties of a Fiduciary7-14 [A] : Duty of Loyalty7-14 [B] : Duty to Disclose Relevant Facts and Render Accounts7-16 [C] : Duty of Due Care7-16 [D] : Duty to Maintain Client Confidences7-18 § 7:2 : Elements of Claim7-18 § 7:2.1 : Existence of a Fiduciary Relationship7-19 § 7:2.2 : Breach of a Fiduciary Duty7-20 § 7:2.3 : Damages Resulting from Breach7-22 [A] : Compensatory Damages7-22 [B] : Punitive Damages7-24 [C] : Prejudgment Interest7-29 § 7:2.4 : Other Available Remedies7-30 [A] : Avoidance of Contract7-30 [B] : Restitutionary Recovery7-31 [C] : Injunctive Relief7-32 [D] : ERISA Remedies7-32 § 7:3 : Affirmative Defense: Statute of Limitations7-33 § 7:4 : Participation by an Accountant in Another Party’s Breach of Fiduciary Duty7-35 § 7:5 : Apportionment and Contribution7-38
	Chapter 8:	Liability Under Other Securities Law Provisions
§ 8:1 : General8-3 § 8:1.1 : Statutes8-3 § 8:1.2 : General Requirements8-3 § 8:1.3 : Preemption of Certain State Court Class Actions8-5 § 8:2 : Section 11 of Securities Act8-8 § 8:2.1 : In General8-8 § 8:2.2 : Requisites8-10 [A] : Material Misstatement or Omission8-10 [B] : In Expertised Portion of Registration Statement8-12 [C] : Plaintiff Bought in Public Offering8-13 § 8:2.3 : Damages8-15 [A] : As Per Statute; Loss Causation Defense8-15 [B] : Apportionment Among Codefendants8-17 § 8:2.4 : Affirmative Defenses8-18 [A] : Due Diligence8-18 [B] : Statute of Limitations8-19 § 8:3 : Section 12(a)(2) of the Securities Act8-21 § 8:3.1 : In General8-21 § 8:3.2 : Requisites8-23 [A] : Securities Sold by Means of Material Misstatement8-23 [B] : Accountant Was Seller8-24 [C] : Proof of Causation Not Required8-27 § 8:3.3 : Damages8-28 § 8:3.4 : Affirmative Defenses8-28 [A] : Due Diligence8-28 [B] : Absence of Loss Causation8-29 [C] : Statute of Limitations8-30 [D] : In Pari Delicto8-32 § 8:4 : Liability Under the Uniform Securities Act8-32 § 8:4.1 : In General8-32 § 8:4.2 : Requisites8-34 [A] : Securities Sold by Means of Material Misstatement8-34 [B] : Accountant Was Seller8-34 [C] : Causation Not Required8-37 § 8:4.3 : Damages8-38 § 8:4.4 : Affirmative Defenses8-38 [A] : Due Diligence8-38 [B] : Statute of Limitations8-39 § 8:5 : Liability Provisions of the Investment Advisers Act8-39 § 8:5.1 : In General8-39 § 8:5.2 : Circumstances Under Which Applicable8-40 § 8:5.3 : Violations8-42 [A] : Fraud8-42 [B] : Failure to Disclose Conflicts of Interest8-44 § 8:5.4 : Standing8-45 § 8:5.5 : Affirmative Defenses8-45 § 8:5.6 : Remedy8-45 § 8:5.7 : Section 509(f) of 2002 Uniform Securities Act As an Alternative8-46 § 8:6 : Section 18 of Securities Exchange Act8-47 § 8:6.1 : In General8-47 § 8:6.2 : Requisites8-50 [A] : Material Misstatement in Filed Document8-50 [B] : Standing8-51 [C] : Reliance and Causation8-52 [D] : Damages8-53 § 8:6.3 : Affirmative Defenses8-54 § 8:7 : Section 14 of Securities Exchange Act8-55 § 8:7.1 : In General8-55 § 8:7.2 : Requisites8-57 [A] : Material Misstatement or Omission8-58 [B] : Scienter8-58 [C] : Reliance8-59 [D] : Causation8-60 [E] : Damages8-62 § 8:7.3 : Affirmative Defense: Statute of Limitations8-63 § 8:8 : Section 10A of Securities Exchange Act8-64 § 8:8.1 : Background8-66 § 8:8.2 : SEC Actions and Proceedings8-67 [A] : Potential Violators8-68 [B] : Scope of an Audit8-68 [C] : Standard of Care8-69 [D] : Illegal Act8-69 [E] : Identifying and Investigating Suspicious Circumstances8-70 [F] : Fines and Sanctions8-71 § 8:8.3 : Private Causes of Action8-71
	Chapter 9:	Litigation Against Accounting Firms
§ 9:1 : Introduction9-1 § 9:2 : Litigation Strategies9-4 § 9:2.1 : Plaintiffs’ Strategies9-4 § 9:2.2 : Defense Strategies9-7 § 9:3 : The Complaint9-9 § 9:4 : Motions to Dismiss9-11 § 9:5 : The Discovery Stage9-26 § 9:5.1 : Document Discovery9-27 § 9:5.2 : Depositions9-33 § 9:5.3 : Expert Discovery9-35 § 9:5.4 : Privilege Statutes9-36 § 9:6 : Summary Judgment9-37 § 9:7 : Motions in Limine9-38 § 9:8 : Trials9-39 § 9:9 : Settlement9-45 § 9:9.1 : Achieving a Settlement9-45 § 9:9.2 : Terms of the Settlement Agreement9-47 [A] : Consideration9-48 [B] : Confidentiality Covenants9-48 [C] : Global Settlements9-49 [D] : Indemnification9-50 § 9:10 : Alternative Dispute Resolution9-52
	Chapter 10:	Disciplinary Proceedings Against Accountants
§ 10:1 : Introduction10-2 § 10:2 : State Disciplinary Proceedings10-2 § 10:2.1 : Regulatory Framework10-3 § 10:2.2 : Initiation of Proceedings10-4 § 10:2.3 : Bases for Disciplinary Action10-6 § 10:2.4 : Investigations and Hearings10-8 § 10:2.5 : Sanctions10-10 § 10:2.6 : Appeals10-11 § 10:2.7 : Reinstatement10-11 § 10:3 : SEC Disciplinary Proceedings10-12 § 10:3.1 : Authority of the SEC10-13 § 10:3.2 : The Investigative Process10-16 § 10:3.3 : Grounds for Disciplinary Proceedings10-17 § 10:3.4 : Suspension Without a Hearing10-21 § 10:3.5 : Hearings10-23 § 10:3.6 : Sanctions10-24 § 10:3.7 : Appeals10-27 § 10:3.8 : Reinstatement10-27 § 10:4 : SEC Injunctive Actions and Cease-and-Desist Proceedings10-28 § 10:5 : PCAOB Disciplinary Proceedings10-31 § 10:5.1 : Background10-31 § 10:5.2 : Investigation10-32 § 10:5.3 : Hearings10-33 § 10:5.4 : Sanctions10-34 § 10:5.5 : Appeals10-35 § 10:6 : AICPA Disciplinary Proceedings10-36 § 10:6.1 : Sources of Disciplinary Complaints10-37 § 10:6.2 : The Disciplinary Process10-37 § 10:6.3 : Sanctions10-40 § 10:6.4 : Appeals10-40 § 10:7 : State Society Disciplinary Proceedings10-41 § 10:8 : Other Regulatory Agencies10-42
	Chapter 11:	Professional Liability Insurance
§ 11:1 : Introduction11-2 § 11:2 : Market for Accountants’ Liability Insurance11-2 § 11:2.1 : Insurance Market for Large Firms11-2 § 11:2.2 : Insurance Market for Mid-Size Firms11-3 § 11:2.3 : Insurance Market for Small Firms11-4 § 11:3 : Policy Terms11-5 § 11:3.1 : Period Covered by Policy11-5 § 11:3.2 : Insured Persons11-6 § 11:3.3 : Covered Actions11-6 § 11:3.4 : Territorial Limitations11-8 § 11:3.5 : Covered Damages11-8 § 11:4 : Limits of Liability and Deductibles11-10 § 11:5 : Exclusions11-11 § 11:6 : Notice of Claims and Insurer Responses11-13 § 11:7 : The Insured’s Duty to Cooperate11-17 § 11:8 : Defense of Insureds11-18 § 11:8.1 : Selection of Counsel11-18 § 11:8.2 : Conflicts of Interests11-22 § 11:8.3 : Defense Strategies11-23 § 11:8.4 : Alternative Dispute Resolution11-25 § 11:8.5 : Settlement of Claims11-26 § 11:8.6 : Counterclaims11-28 § 11:9 : Subrogation Rights11-30 § 11:10 : Cancellation and Rescission11-31 § 11:11 : Changing Insurers11-32 § 11:12 : Discovery of Insurance Coverage11-33
	Chapter 12:	Table of Cases
	Chapter 13:	Index to Accountants' Liability

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[Accountants’ Liability provides] a splendid analysis of the current environment affecting accountants’ liability … a landmark authority.”

Quinton F. Seamons, Wilson & McIlvaine, Chicago

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