Business Law Study Set 14

Business

Quiz 48 :

Professional Liability and Accountability

Quiz 48 :

Professional Liability and Accountability

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A QUESTION OF ETHICS: Liability for Negligence. Portland Shellfish Co. processes live shellfish in Maine. As one of the firm's two owners, Frank Wetmore held 300 voting and 150 nonvoting shares of the stock. Donna Holden held the other 300 voting shares. Donna's husband Jeff managed the company's daily operations, including production, procurement, and sales. The board of directors consisted of Frank and Jeff. In 2001, disagreements arose over the company's management. The Holdens invoked the "Shareholders' Agreement," which provided that "[i]n the event of a deadlock, the directors shall hire an accountant at [Macdonald, Page, Schatz, Fletcher Co., LLC] to determine the value of the outstanding shares. … [E]ach shareholder shall have the right to buy out the other shareholder(s)' interest." Macdonald Page estimated the stock's "fair market value" to be $1.09 million. Donna offered to buy Frank's shares at a price equal to his proportionate share. Frank countered by offering $1.25 million for Donna's shares. Donna rejected Frank's offer and insisted that he sell his shares to her or she would sue. In the face of this threat, Frank sold his shares to Donna for $750,705. Believing the stock to be worth more than twice Macdonald Page's estimate, Frank filed a suit in a federal district court against the accountant. [ Wetmore v. Macdonald, Page, Schatz, Fletcher Co., LLC, 476 F.3d 1 (1st Cir. 2007)] (a) Frank claimed that in valuing the stock, the accountant disregarded "commonly accepted and reliable methods of valuation in favor of less reliable methods." He alleged negligence, among other things. Macdonald Page filed a motion to dismiss the complaint. What are the elements that establish negligence Which is the most critical element in this case (b) Macdonald Page evaluated the company's stock by identifying its "fair market value," defined as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of relevant facts." The accountant knew that the shareholders would use its estimate to determine the price that one would pay to the other. Under these circumstances, was Frank's injury foreseeable (c) What factor might have influenced Frank to sell his shares to Donna even though he thought that Macdonald Page's "fair market value" figure was less than half of what it should have been Does this factor represent an unfair, or unethical, advantage
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a). Negligence Elements:
In the case Wetmore v. Macdonald, Page, Schatz, Fletcher Co., LLC , 476 F.3d 1 (1 st Cir. 2007) the judge recommended granted Macdonald's motion for dismissal. The district court upheld the recommendation. The U.S. Court of Appeals reversed the district court's dismissal of Wetmore's complaint and remanded the case for further proceedings.
The most critical element in this case was causation, which the district court stated was missing from all three claims: Count I charges professional negligence, Count II charges breach of contract and Count III charges negligent misrepresentation.
The Appeals Court stated that a valuation negligently calculated that set an artificially low floor would not have a substantial effect on a shareholder in Wetmore's position ignores the logic of cause and effect.
The elements of professional negligence in a claim must establish the appropriate standard of care, demonstrate that the defendant deviated from that standard, and prove that the deviation  caused  the plaintiff's damages.
b). Foreseeable Injury:
The Court stated that Wetmore's injury was entirely foreseeable. Buy-sell provisions are meant to protect against an artificially low bidding floor. The protection is valid only if the valuation of the company is performed accurately. Otherwise, the inaccurate valuation skews the entire process.
Therefore, it was foreseeable that a shareholder who receives a low bid based on a negligently-reached valuation would suffer a loss. In the letter of engagement sent by Macdonald Page, they confirmed the knowledge that its valuation would play a key role in the bidding process.
c). Fair Market Value:
Factors that would have induced Frank to sell his shares to Donna regardless of the undervalued price include:
1. If the company was on the brink of insolvency.
2. If he needed the money immediately.
3. If he wanted to get out of the business.
All three of these factors represent an unfair and unethical advantage because the stock was undervalued. In options 2 and 3 of these instances, Frank would have been compelled to sell at the lower price for a loss. Under option 1, Frank would have been acting unfair and unethical by taking advantage of Donna's lack of knowledge about the business's solvency.

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Does the national Do Not Call Registry adversely affect the way that business is conducted in this country If so, how Should Congress enact a Do Not Spam law Why or why not
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CASE PROBLEM WITH SAMPLE ANSWER: Accountant's liability or Audit. A West Virginia bank ran its asset value from $100 million to $1 billion over seven years by aggressively marketing subprime loans. The Office of the Comptroller of the Currency, a federal regulator, audited the bank and discovered that the books had been falsified for several years and that the bank was insolvent. The Comptroller closed the bank and brought criminal charges against its managers. The Comptroller fined Grant Thornton, the bank's accounting firm, $300,000 for recklessly failing to meet generally accepted auditing standards during the years it audited the bank. The Comptroller claimed Thornton violated federal law by "participating in … unsafe and unsound banking practice." Thornton appealed, contending that it was not involved in bank operations to that extent based on its audit function. What would be the key to determining if the accounting firm could be held liable for that violation of federal law [ Grant Thornton, LLP v. Office of the Comptroller of the Currency, 514 F.3d 1328 (D.C. Cir. 2008)]
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Accountant's Liability for Audit:
In the case Grant Thornton, LLP v. Office of the Comptroller of the Currency, 514 F.3d 1328 (D.C.Cir. 2008), Grant paid civil penalties for recklessly failing to meet Generally Accepted Auditing Standards (GAAS) as well as imposing a host of conditions whenever it audits depository institutions.
The U.S. Court of Appeals vacated the final decision and both orders.
The Court reasoned that when an accounting firm performs an external audit to verify the accuracy of a bank's books, it is not conducting the business or the affairs of the bank.

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Professional's Liability Soon after Teresa DeYoung's husband died, her mother-in-law also died, leaving an inheritance of more than $400,000 for DeYoung's children. DeYoung hired John Ruggerio, an attorney, to ensure that her children would receive it. Ruggerio advised her to invest the funds in his real estate business. She declined. A few months later, $300,000 of the inheritance was sent to Ruggerio. Without telling DeYoung, he deposited the $300,000 in his account and began to use the funds in his real estate business. Nine months later, $109,000 of the inheritance was sent to Ruggerio. He paid this to DeYoung. She asked about the remaining amount. Ruggerio lied to hide his theft. Unable to access these funds, DeYoung's children changed their college plans to attend less expensive institutions. Nearly three years later, DeYoung learned the truth. Can she bring a suit against Ruggerio If so, on what ground If not, why not Did Ruggerio violate any standard of professional ethics Discuss. [ DeYoung v. Ruggerio , 185 Vt. 267, 971 A.2d 627 (2009)]
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Accountant's Liability under Rule 10b-5 In early 2011, Bennett, Inc., offered a substantial number of new common shares to the public. Harvey Helms had a longstanding interest in Bennett because his grandfather had once been president of the company. On receiving a prospectus prepared and distributed by Bennett, Helms was dismayed by the pessimism it embodied. Helms decided to delay purchasing stock in the company. Later, Helms asserted that the prospectus prepared by the accountants was overly pessimistic and contained materially misleading statements. Discuss fully how successful Helms would be in bringing a cause of action under Rule 10b-5against the accountants of Bennett, Inc.
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The Ultramares Rule Larkin, Inc., retains Howard Patterson to manage its books and prepare its financial statements. Patterson, a certified public accountant, lives in Indiana and practices there. After twenty years, Patterson has become a bit bored with generally accepted accounting principles (GAAP) and has adopted more creative accounting methods. Now, though, Patterson has a problem, as he is being sued by Molly Tucker, one of Larkin's creditors. Tucker alleges that Patterson either knew or should have known that Larkin's financial statements would be distributed to various individuals. Furthermore, she asserts that these financial statements were negligently prepared and seriously inaccurate. What are the consequences of Patterson's failure to follow GAAP Under the traditional U tramares rule, can Tucker recover damages from Patterson Explain.
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Why did the court affirm the dismissal of Guido's individual claim but not the claims that she had brought on behalf of the children
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If 90 percent of the toxic waste at a given site can be removed for $50,000, but removing the last 10 percent will cost $2 million, is it reasonable to require that the last. 10 percent be removed How would you address this question
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Can you think of a better way that the law can address the problem of global warming, which is clearly not just a national issue Explain.
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QUESTION WITH SAMPLE ANSWER: The Restatement Rule. The accounting firm of Goldman, Walters, Johnson Co. prepared financial statements for Lucy's Fashions, Inc. After reviewing the various financial statements, Happydays State Bank agreed to loan Lucy's Fashions $35,000 for expansion. When Lucy's Fashions declared bankruptcy under Chapter 11 six months later, Flappydays State Bank promptly filed an action against Goldman, Walters, Johnson Co., alleging negligent preparation of financial statements. Assuming that the court has abandoned the Ultramares approach, what is the result What are the policy reasons for holding accountants liable to third parties with whom they are not in privity
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Liability for Fraud In October 1993, Marilyn Greenen, a licensed certified public accountant (CPA), began working at the Port of Vancouver, Washington (the Port), as an account manager. She was not directly engaged in public accounting at the Port, but she oversaw the preparation of financial statements and supervised employees with accounting duties. At the start of her employment, she enrolled her husband for benefits under the Port's medical plan. Her marriage was dissolved in November, but she did not notify the Port of the change. In May 1998 and April 1999, the Port confronted her about the divorce, but she did not update her insurance information. After she was terminated, she reimbursed the Port for the additional premiums it had paid for unauthorized coverage for her former spouse. The Washington State Board of Accountancy imposed sanctions on Greenen for "dishonesty and misleading representations" while, in the words of an applicable state statute, "representing oneself as a CPA." Greenen asked a Washington state court to review the case. What might be an appropriate sanction in this case What might be Greenen's best argument against the board's action On what reasoning might the court uphold the decision [Greenen v. Washington State Board of Accountancy , 824 Wash.App. 126,110 P.3d 224 (2005)]
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In a time of economic recession, should the government wait until there is scientific proof of the harmful effects on humans and wildlife before attempting to regulate pharmaceuticals in drinking water Or should the government enact legislation to address the problem now-before it becomes worse Discuss fully.
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If the children had suffered no harm as a result of the attorney's malpractice, would the outcome of this case have been different Why or why not
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Professional Malpractice Jeffery Guerrero hired James McDonald, a certified public accountant, to represent him and his business in an appeal to the Internal Revenue Service. The appeal was about audits that showed Guerrero owed more taxes. When the appeal failed, McDonald helped Guerrero prepare materials for an appeal to the Tax Court, which was also unsuccessful. Guerrero then sued McDonald for professional negligence in the preparation of his evidence for the court. Specifically, Guerrero claimed that McDonald had failed to adequately prepare witnesses and to present all the arguments that could have been made on his behalf so that he could have won the case. Guerrero contended that McDonald was liable for all of the additional taxes he was required to pay. Is Guerrero's claim likely to result in liability on McDonald's part What factors would the court consider [ Guerrero v. McDonald , 302 Ga.App. 164, 690 S.E.2d 486 (2010)]
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VIDEO QUESTION: Potential Liability to Third Parties. Go to this text's Web site at www.cengage.com/blaw/darkson and select "Chapter 48.'' Click on "Video Questions" and view the video titled Accountant's Liability. Then answer the following questions. (a) Should Ray prepare a financial statement that values a list of assets provided by the advertising firm without verifying that the firm actually owns these assets (b) Discuss whether Ray is in privity with the company interested in buying Laura's advertising firm. (c) Under the Ultramares rule, to whom does Ray owe a duty
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