Liability Of Certified Public Accountants CPA

Liability of Certified Public Accounts

An accountant is someone who prepares and analyzes financial records for a company, a government, or an individual. Decision makers to interpret financial information to plan then use these financial records. A certified public account (C.P.A.) is an accountant who takes and passes a uniform state test and then obtains a special license to practice.

Accountants are professionals whose expertise and knowledge the clients that hire them count on. Because of this expertise, the reports and financial statements that an accountant produces for his clients are considered a fair and accurate reporting of their clients' financial situation.

Clients and third parties use these reports and financial statements to make important decisions. Because of how these reports and financial statements are used, an accountant has a liability to his clients and sometimes to third parties. There is potential liability under:

(1) Common law

(2) Securities Laws

(3) Internal Revenue Code

An Accountant's Liability to his Clients under Common Law

An accountant's common law liability to his client can include:

(1) Breach of contract

(2) Negligence

(3) Fraud

Breach of contract is the failure, without legal excuse, of an account to perform the obligation of the contract between the client and the accountant. The accountant owes a duty to his client to honor the terms of the contract that they entered into.

If the contract is breached the accountant can be held liable for expenses incurred by the client in finding and hiring another accountant as well as any penalties imposed on the client and any other monetary losses that are foreseeable.

Negligence is the failure to exercise the standard of care that a reasonable person would exercise in similar circumstances. To show negligence, four elements must be proved.

The elements of Negligence:

(1) A duty of care existed

(2) The duty of care was breached

(3) The plaintiff (client) suffered an injury

(4) The injury was proximately caused by the defendants (accountants) breach of duty of care.

An accountant has the standard of care to conform to generally accepted accounting

practices (GAAP) and to generally accepted auditing standards (GAAS). Any violation to these standards is considered evidence of negligence on the part of the accountant, although compliance to these standards does not necessarily relieve them of the potential for legal liability.

Fraud is any misrepresentation, by either misstatement or omission of material fact, knowingly made with the intention of deceiving another and on which a reasonable person would and does rely to his detriment.

There are four elements to fraud.