Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 15

The following quotation was in the court ruling in the case of the Public108 Employees’ Retirement Association of Colorado v. Deloitte & Touche, LLP:

It is not an accountant’s fault if its client actively conspires with others in order to deprive the accountant of accurate information about the client’s finances. It would be wrong and counter to the purposes of the Private Securities Litigation Reform Act to find an accountant liable in such an instance.

a. Evaluate this statement from the perspective of the scienter requirements discussed in the text.

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b. Explain the implications of the PSLRA for audit responsibilities and auditor legal liability.

Step 1 of 2

a.

Courts use “scienter” or motive or intention to commit fraud as a claim against an accountant. The courts also mentioned that cases of an accountant’s “recklessness” in their professional conduct may be so much to be considered as intention thus satisfying the scienter requirement. Thus, accountants may be liable for fraud due to recklessness, even if they did not have a motive to commit fraud.

Plaintiffs may want to find accountants guilty for failing to detect fraud. However, recklessness, an element of scienter, requires that the accountant fail to comply by their professional conduct.