Question 1

Rand, an accountant, includes a false statement in a report for Social Media Inc. that is filed with the Securities and Exchange Commission. When Teo buys stock in Social Media and loses money on the investment, he files a suit against Rand, alleging fraud under the 1934 Securities Exchange Act. To avoid liability, Rand can show that he

Accepted Answer

Rand can avoid liability for fraud under the 1934 Securities Exchange Act by demonstrating that he had no knowledge that the statement was false. The Act requires that the defendant acted knowingly or with reckless disregard for the truth for liability to attach.

Question 2

Reliant Inc. files a suit against Saul, an accountant, under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. To succeed, Reliant must show that Saul

Accepted Answer

To succeed in a suit under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5, Reliant must show that Saul acted with scienter, which means with a wrongful state of mind, including intent to deceive, manipulate, or defraud.

Question 3

Herb, an accountant, helps Industrial Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is

Accepted Answer

Preparing and filing a false federal corporate income tax return is considered a felony under the Internal Revenue Code, punishable by both a fine and imprisonment.

Question 4

Finola, a certified public accountant, provides accounting services to Global Trade Corporation. The services include preparing Global Trade's financial reports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola's reports nor her opinion letters indicate this situation. Relying on Finola's portrayal of Global Trade's financial situation, the firm borrows a large sum of money to build a new shipping facility. In lending Global Trade the money, Harbor City Bank relies on Finola's opinion letter. Finola is aware of this reliance. If Finola did not engage in intentional fraud but was negligent, what is her potential liability?

Accepted Answer

The answer of Finola, a certified public accountant, provides accounting...

Question 5

Marco is an accountant who prepares his clients' tax returns. Nell is not an accountant, but she also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on

Accepted Answer

The Internal Revenue Code does not limit liability for preparing a false return to licensed accountants. Both professionals and non-professionals who prepare tax returns for clients can be held liable if they prepare false returns, hence both Marco and Nell could be held liable.

Question 6

Reed prepares federal corporate income tax returns for Shopping Mall Inc. and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for

Accepted Answer

Under the Internal Revenue Code, tax preparers like Reed can be held liable for any understatement of a client's tax liability due to either negligent or willful misconduct. This includes mistakes made out of carelessness as well as intentional acts to understate tax liability.

Question 7

Sims, an accountant, prepares for Taco Corporation a financial statement that omits a material fact. The financial statement is included in Taco's registration statement, which Uri reads. Uri buys Taco stock. Under Section 11 of the Securities Act of 1933, for Sims to be liable for the omission, Uri must show that he

Accepted Answer

Under Section 11 of the Securities Act of 1933, a plaintiff (like Uri) does not need to prove reliance on the omission or misstatement in the registration statement to hold the accountant (Sims) liable. The plaintiff must only show that there was a material omission or misstatement and that they suffered a loss on the stock. Knowledge about the omission before purchase or being a sophisticated investor is irrelevant to establishing liability under Section 11.

Question 8

Silva prepares federal corporate income tax returns for Trade Stores Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Silva may be liable for

Accepted Answer

Under the Internal Revenue Code, tax preparers like Silva can be held liable for both negligent and willful misconduct related to the understatement of a client's tax liability. Negligence involves a lack of due care or failure to do what a reasonable person would do, while willful misconduct involves intentional wrongdoing or actions taken with a reckless disregard for the law.

Question 9

Miriam is an accountant. Natalie is an attorney. Which professional is most restricted from disclosing her or his client's communication?

Accepted Answer

The answer of Miriam is an accountant. Natalie is an...

Question 10

Cliff is an attorney whose clients include Data Inc. Unless Data has violated securities law, the contents of Cliff's file on the firm may be disclosed to a third party

Accepted Answer

The contents of Cliff's file on Data Inc. are protected by attorney-client privilege and can only be disclosed with Data's consent unless there is a legal exception such as a court order.

Question 11

Cath is an accountant with Discount Corporation. Efrem buys Discount stock and loses money on the investment. To recover from Cath under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove

Accepted Answer

To recover under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove fraud, reliance, materiality, causation, and scienter. Scienter refers to a defendant's knowledge of the wrongfulness of an act or omission, which is a crucial element in securities fraud cases.

Question 12

Leisure Inc.'s accountant is Mel and the firm's attorney is Nola. All states protect, as privileged information, Leisure's communications with

Accepted Answer

Attorney-client privilege protects communications between a client and their attorney (Nola in this case) from being disclosed without the permission of the client. There is no similar widespread legal privilege for communications between a client and their accountant (Mel).

Quiz 42: Professional Liability and Accountability