Quiz 47: Accountants Liability and Malpractice

Business

Refer to the case Citizens State Bank v Timm, Schmidt Co. to answer question as below: Facts to this case • An accounting firm made misstatements on a client's financial statements. • A bank relied on the accounting's financial statements to lend money to the client. • The bank was unable to receive payment on their loans and sued the accounting firm for malpractice. Case Issue The issue is whether the accounting firm is liable to the bank for their misstatement. Note that the debtor hired the accounting firm for their services; the bank is a third party which used the financial statements. Relevant Terms, Laws, and Cases Malpractice - is when a professional, such as doctor, lawyer, or accountants, work which results in an injury to another. Analysis and Conclusion The court held for the bank. They argued that: • Historically, accounting firms are not liable to third parties for damages due to the accountant's work. • However, the court found recent arguments that professionals should be liable to injured third parties to promote the duty of care of the professional in their service. • The third parties that may sue for damages are those that the accountant may foresee to have received the accountant's work. • Testimony reviewed that the accounting firm's employee had expected creditors of their client to review these statements. Thus, the bank can sue for malpractice.

Refer to the case Williams Controls v Parente, Randolph, Orlando, Associates to answer question as below: Facts to this case • An accounting firm made misstatements in their client's financial statement. • W relied on these reports to make purchase from the client. • The accounting firm knew W would be using those reports. • W found they overpaid for the purchases. Case Issue The issue is whether the accounting firm is liable to W. Relevant Terms, Laws, and Cases Malpractice - is when a professional, such as doctor, lawyer, or accountants, work which results in an injury to another. Analysis and Conclusion The court cited that prior cases required privity of contract to sue for negligence. In this case, W was not the firm that hired the accountant, thus, W had no privity of contract to sue for negligence. However, the court cited that the accounting firm can be liable for negligent misrepresentation; privity is not required for negligent misrepresentation. They were aware that W would be using the reports and their misstatements caused injuries to W. The court also held that summary judgment can't be granted to the accounting firm for breach of contract. As there was a question whether W was an intended beneficiary for the auditing contract between the accountant and their client. The reason in W's favor was that W relied on the contract to purchase assets from the client, and W may have been intended to benefit from the audit because they need it to make purchase from the client. If W was an intended beneficiary they have a claim for breach of contract. Thus, the accountant is not liable for negligence only.

Refer to the case Ronsons v Talesnik to answer question as below: Facts to this case • An accountant performed work for R and his company. • R owed back taxes on his company and asked the accountant for not having interest accrue on those taxes. • The accountant gave advice that R followed but didn't work. Case Issue The issue is whether the accountant is liable for the failed advice they gave. Relevant Terms, Laws, and Cases Malpractice - is when a professional, such as doctor, lawyer, or accountants, work which results in an injury to another. Analysis and Conclusion The court held for R. They argued that: • The accountant is liable to their client for the advice. • The advice was wrong and the client owed interest on their taxes. • Holding accountants liable for these is to promote their duty of care to clients. Thus, the accountant is liable.

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