Business Law Chapter 48

Lebron accuses Moe, an attorney, of committing malpractice. Malpractice is

A MISTAKE IN JUDGMENT

Bob, an accountant, intentionally misstates a material fact to mislead Consolidated Industries, Inc., a client. Consolidated justifiably relies on the misstatement to its detriment. Bob is most likely liable for

ACTUAL fraud.

Jerzy is an accountant whose clients include Kopper Kettle Restaurants, Inc. For a violation of securities laws, Jerzy may be subject to

CRIMINAL liability.

Craig is an accountant whose clients include Digby National Corporation. Elbert is Craig's attorney. Working papers that Craig develops when preparing financial reports for Digby are owned by

Craig.

Bryce's accountant is Caleb and his attorney is Delilah. All states protect, as privileged information, Bryce's communications with

Delilah ONLY.

Doug is an accountant whose clients include Everyday Products, Inc. (EPI). Under the Ultramares rule, if Doug is negligent in his work for EPI, he could be liable to

EPI ONLY.

Grover Nut Company files a suit against Hud, its former accountant, alleging actual fraud. Grover must prove

INTENT TO DECEIVE.

National Business Systems Corporation (NBS) files a suit against Molly, its former accountant, alleging constructive fraud. NBS need not prove

INTENT TO DECEIVE.

Leslie, an accountant, enters into a contract to provide services to Marty. Leslie does not finish the work within the contract's deadline. Leslie is

LIABLE FOR BREACH OF CONTRACT.

Quibble Company's liabilities exceed its assets. Quibble hires Roo & Slay, an accounting firm, to prepare a balance sheet. Through Roo & Slay's negligent omissions, the sheet shows a net worth. Town Bank relies on the balance sheet to make a loan to Quibble. When Quibble defaults, Town files a suit against Roo & Slay. Under the Restatement rule, Roo & Slay is most likely

LIABLE IF ROO & SLAY KNEW that Town would rely on the balance sheet.

Lacy is an accountant who prepares her clients' tax returns. Muff is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on

Lacy AND Muff.

Marquis Company's liabilities exceed its assets, but the firm's employees falsify its books to reflect a positive net worth. Marquis hires Nan & Ollie, an accounting firm, to prepare a balance sheet, which is certified to show a net worth. Pure Credit Corporation relies on the balance sheet to make a loan to Marquis. When the firm defaults, Pure Credit files a suit against Nan & Ollie. Under the Ultramares rule, the accounting firm is most likely

NOT liable because Nan & Ollie and Pure Credit were not in privity.

Jim, an accountant, contracts to perform services for Kasey. Jim acts in good faith and conforms with generally accepted accounting principles, but makes a mistake in judgment. Jim is most likely

NOT liable.

Pace is an attorney, whose clients include Quikfeet Running Shoes Company. Unless Quikfeet has violated securities law, the contents of Pace's file on Quikfeet may be disclosed to someone other than Quikfeet

ONLY WITH QUIKFEET'S CONSENT.

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

Pam SUFFERED A LOSS on the stock.

Pat, an accountant, includes a false statement in a report for Quantity, Inc., that is filed with the Securities and Exchange Commission. Quantity publishes a misleading ad about its future prospects. Rita sees the ad and calls Stan, who buys stock in Quantity. Under Section 18 of the Securities Exchange Act of 1934, liability may attach to

Pat's report.

Nina, an accountant, prepares for Omni Corporation a financial statement that misstates a material fact. The statement is included in Omni's registration statement. Pete, who is in privity with Nina, and Quinn, who is not, each buy Omni stock. Under Section 11 of the Securities Act of 1933, Nina may be liable to

Pete AND Quinn.

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

SCIENTER, fraud, reliance, materiality, AND CAUSATION ONLY.

Rex, an accountant, enters into a contract to provide services to Sofi. Rex does not finish the work within the contract's deadline. Sofi pays a penalty for the missed deadline and hires Trey to complete the job. Rex is most likely liable for

Sofi's penalty AND the cost to hire Trey.

Quin, an accountant, prepares for Reddy, Inc., a financial statement that omits a material fact. The statement is included in Reddy's registration statement with the Securities and Exchange Commission. Timor, who reads the statement, and Ubi, who does not, each buy Reddy stock. Velma reads the statement but does not buy the stock. Under Section 11 of the Securities Act of 1933, Quin may be liable to

Timor AND Ubi.

Faith and Gordon are accountants who work together. Faith and Gordon can limit their potential liability for each other's misconduct by organizing their business as

a PROFESSIONAL corporation.

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

a felony punishable by a fine AND imprisonment.

Hadley and Ilene are accountants who work together. Hadley and Ilene can limit their potential liability for each other's misconduct by organizing their business as

a limited liability partnership.

Longhaul Freight, Inc., files a suit against Midge, 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, Longhaul must show that Midge

acted with scienter.

Dwayne can be described as "a reasonably competent general practitioner of ordinary skill, experience, and capacity." This is the normal standard for judging the performance of

an attorney.

Jim, an attorney, allows a statute of limitations to lapse on a claim by Midwest Manufacturing Company, a client. Jim

can be held liable for MALPRACTICE.

Pluto accuses Quark, an accountant, of committing defalcation. This is

embezzlement.

Filtration Products, Inc., files a suit against Emmett, its former accountant, alleging constructive fraud. Emmett may be held liable

if Emmett was GROSSLY NEGLIGENT in the performance of his duties.

Bruno is an accountant. Under the Sarbanes-Oxley Act of 2002, the de-gree of government oversight over the public accounting practices of Bruno and other accountants was

increased.

Estes, an accountant, contracts to perform services for Frasier. In performing those services, Estes uncovers a suspicious financial transaction. Estes is most likely not liable if he

investigates and reports the discovery to Frasier.

Tiny is an accountant. Tiny's violation of generally accepted accounting principles and generally accepted auditing standards

is PRIMA FACIE EVIDENCE that Tiny was negligent.

Gert, an accountant, contracts to conduct an audit for Hailey. In performing the audit, Gert fails to detect certain misconduct. Gert is most likely

liable if a NORMAL AUDIT would have revealed the misconduct.

Lara, an accountant, conducts an audit of Microstuff, Inc. After the con-clusion of the audit, the working papers created in preparing the audit must be

maintained for seven years.

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

negligent OR willful misconduct.

Penelope is an attorney. Penelope's conduct is governed by rules of professional conduct established by the state in which she is licensed, and the Model Rules of Professional Conduct drafted by

the American Bar Association.

Lucille, an accountant, is subject to the accounting conventions, rules, and procedures that constitute generally accepted accounting principles (GAAP). GAAP are determined by

the Financial Accounting Standards Board.

Yves is an accountant charged with negligence by Zesty Soup Company, a client. Yves may successfully defend against the claim if he can show that

the negligence was NOT THE PROXIMATE CAUSE of the client's losses.

Rollo is an attorney whose clients include Superior Credit Company. If Rollo is negligent in his work for Superior, under the Restatement (Second) of Torts, Rollo may be liable to Superior and

third parties who are FORESEEN users of the work.

Tony is an accountant whose clients include U-All Company. If Tony is negligent in his work for U-All, most courts would hold him liable to U-All and

third parties who are FORESEEN users of the work.

Meri, an accountant, includes a false statement in a report for Novelty Paper Products, Inc. (NPPI) that is filed with the Securities and Exchange Commission. When Otho buys stock in NPPI and loses money on the investment, he files a suit against Meri, alleging fraud under the 1934 Securities Exchange Act. To avoid liability, Meri can show that she

was NOT AWARE her statement was false.