Common Law Liability

Legal Responsibilities Common Law Liability- Plaintiff must show accountant failed to exercise due care to recover money damages Negligence- (reliance need not be proven) 1. Duty of care breached 2. Cause 3. Harm Fraud- Punitive Damages may be assessed for actual or constructive fraud Misrepresentation Scienter (Reckless disregard for truth- “constructive fraud”) Reliance Intent to deceive Damages Civil Liability to 3rd Parties Ordinary Negligence- Privity must be shown to recover damages for ordinary negligence. Gross Negligence- Extends liability to unknown 3rd parties Ultramares Doctrine- accountant is only liable for negligence to parties for whose primary benefit the work was intended. Fraud (must show)1. Material Misstatement or Omission 2. Scienter 3. Reliance 4. Damages suffered Securities Act of 1933 • Requires registration statement issued prior to IPO in interstate commerce ○ Includes audited F/S ○ Liability extends to issuance date (not when work was completed) • Requires prospectus be provided to investors • Liability under Section 11 ○ No contract required, anyone who bought the security can sue ○ Must only show registration statement was inaccurate ○ Reliance & Privity need not be shown ○ Defense: Due Dilligence ○ Damages: Loss on sale of stock, or difference between IPO price and Market Value when suit is brought. ○ Statute of Limitations: 1 year from time error should have been discovered. In any case, cannot exceed 3 years from the IPO ○ Must only show:

Legal Responsibilities  Duty of Care existed  Breach of that duty  Cause  Injury Securities Act of 1934 • Regulates securities traded on national exchanges • Applies to: Companies w/ >$10m in assets, and 500+ equity security holders on last day of fiscal year • Requires that 10K be filed • Civil liability for making false/misleading statement regarding a material fact • Investor’s Burden of Proof: ○ Bought/Sold security at price affected by misleading statement ○ Unaware of misstatement or error ○ Reliance ○ Scienter on part of accountant • Defense: Good Faith • Mere negligence = No Liability under the 1934 Act Prohibited Non-Audit Services to Audit Client • Bookkeeping; financial information system design and implementation; appraisal or valuation services; actuarial services; internal audit outsourcing services; management functions or human resources; broker or dealer investment advisor or investment banking services; and legal and expert services.