Quiz 47: Accountants Liability and Malpractice


If a third party is injured by fraud or constructive fraud by an accountant, they can sue the accountant regardless if they had no relation to the contract between accountant and the client. Thus, privity to contract is irrelevant to fraud and constructive fraud. However, if a third party is the intended beneficiary they can sue under contract laws and negligence. The answer is d.

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.

I) The factor that the auditor was negligent is necessary to show for torts dealing with negligence and negligent misrepresentation. II) This is also required because the bank can only be injured by the auditor if they had relied on the auditing report. Both factors are correct. The answer is c.

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