What is the difference between contract principles and tort principles?
Contract: Prepare the tax return diligently and competently
Tort: Professional duty to exercise the level of skill, care, and diligence commonly exercised by other members of the profession in similar circumstances
Who can sue the CPA for breach of contract?
Only a party to the contract due to privity
What is breach of contract?
If a CPA does not fulfill the terms of his engagement.
What three torts are relevant regarding CPA liability?
Constructive Fraud (aka gross negligence)
Failure to exercise due care or failure to perform with the same skill and care expected of ordinarily prudent CPAs under the same circumstances.
This also includes proper supervision: are you properly supervising those who work under you?
True / False: For a client to make a case against a CPA for negligence, the client must show that the breach caused the plaintiff injury and damages.
To whom is the duty regarding negligence by a CPA owed?
The client and any person whom the CPA knows will be relying on the CPA’s work. This includes the creditors and investors who typically use this information.
What are the 5 elements of fraud?
M – A – I – D – S
Misrepresentation of material fact
Actual and justifiable reliance by plaintiff on the misrepresentation
Intent to induce plaintiff’s reliance on the misrepresentation
Scienter [L. to knowingly separate one thing from another] = Intent to deceive (knowing that the statement was false)
How are the elements of fraud different from the elements of gross negligence (constructive fraud)?
All of the elements are the same except instead of knowingly making a false statement, the CPA makes a statement without knowing whether it is true or false. The CPA is reckless.
What are the five Levels of Fault
Reasonable Care = no fault
Ordinary Negligence = lack of reasonable care
Gross Negligence (constructive fraud) = lack of even slight care
Actual Fraud = intent to deceive
Criminal Fraud = same as actual fraud but prosecution by the government
To whom is the duty regarding fraud or constructive negligence by a CPA owed?
To anyone who can prove it
For which of the following damages is a CPA typically responsible when associated with errors, negligence, or fraud when preparing a tax return? (1) the actual taxes owed, (2) penalties, (3) interest, (4) costs incurred to correct tax returns, (5) consequential damages
(1) Not typically responsible unless the taxpayer overpaid the tax and is unable to obtain a refund
(2) The CPA is typically responsible
(3) The CPA is responsible for actual damages owed by the taxpayer
(4) The CPA may be responsible
(5) The CPA may be responsible for lost investment or income opportunities suffered by the taxpayer
When is a CPA covered by attorney-client privilege?
When the attorney engages the CPA to provide advice regarding accounting or tax issues. That’s because the work the CPA does is for the lawyer and not for the client.
What is Work Product Privilege?
Covers the workpapers created a federally authorized tax practitioner specifically in preparation for the litigation; not the workpapers created for the tax return. This only applies in civil and not criminal cases.
Who owns the workpapers created by the accountant?
The accountant or the firm, NOT the client
To whom may workpapers be disclosed without incurring breach of confidentiality?
In response to a subpoena relevant to a court case
To a prospective purchaser of the CPA’s firm as long as the prospective purchaser does not disclose the confidential information
To a state CPA society quality-control review panel
In defense of a lawsuit brought by a client
In defense of an official investigation by the AICPA/state trial board
When GAAP requires disclosure of such info in the financial statements
True / False: The tax practitioner privilege applies to written communication between a federally authorized tax practitioner and persons with whom the tax practitioner is promoting the participation of the tax shelter.
True / False: The CPA may provide copies of workpapers to a prospective purchaser of the firm.
Unless he obtains written permission from the client
True / False: Punitive damages may be awarded for negligence or breach of contract.
Punitive damages are only awarded when the situation involves fraud.
True / False: When a CPA sells his firm, the workpapers of previous tax returns stay with the firm.
The workpapers are confidential information and can only be passed on with the consent of the client.