Liability of CPA

This article discusses the duties and liabilities of Certified Public Accountants (CPA) under the Securities Act of 1933 and the Securities Exchange Act of 1934. It explains the consequences of negligence and fraud in financial audit services and provides case studies and legal aspects related to CPA liability. The article covers topics such as the duty of care towards clients and third parties, Generally accepted accounting principles (GAAP), and Generally accepted auditing Standards (GAAS).

Running Head: Liability of CPA
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Liability of CPA
Contents
SOLUTION 1.............................................................................................................................3
INTRODUCTION..................................................................................................................3
LIABILITY OF CERTIFIED PUBLIC ACCOUNTANTS...................................................3
CONCLUSION......................................................................................................................5
SOLUTION 2.............................................................................................................................6
INTRODUCTION..................................................................................................................6
LIABILITY OF CHARLENE:...............................................................................................6
CONCLUSION......................................................................................................................8
SOLUTION 3.............................................................................................................................8
INTRODUCTION:.................................................................................................................9
LIABILITY:...........................................................................................................................9
CONCLUSION:...................................................................................................................11
REFERENCES.........................................................................................................................12
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Liability of CPA
SOLUTION 1:
INTRODUCTION:
That the Certified Public Accountant (CPA) is duty bound to perform the assured services of
financial audit subject to the reasonableness of disclosures and got freedom from the material
misstatements which are accepted to the generally accepted accounting principles. As under
the common law, the accountants and the professionals are held liable for the breach of any
terms of the contract or for any of the negligent act done by her. While giving the services as
an accountant or the auditor, the Certified Public Accountants have the duty of care towards
their clients as well as towards the third party. It is furthermore submitted that under the
Florida laws, the Certified Public Accountants can be sued for the recovery of the losses
borne by the third parties due to the negligence of the Accountants in performing their duties.
It is relevant to mention here that if the opinions of the Certified Public Accountants affects
their clients as well as the investors, stock holders, creditors of the firm or the partners then
they may be liable to compensate them for the misleading statements or report.
LIABILITY OF CERTIFIED PUBLIC ACCOUNTANTS:
That it is not out of place to mention here that the Accountants play the major role in the
financial system of any of the business. It is furthermore submitted that the accountants are
the person who maintains and established the financial system of any of the business. The
accountants are under the duty to prepare the financial statements which reflect the individual
or the business's financial status. The accountant should exercise the degree of care that the
normal accountant would exercise. From the facts of the case, it is clear that Mona is duty
bound to perform her act with due diligence and care, but she failed to do so. Under the
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Liability of CPA
common law, the accountants can be held liable for breach of contract, negligence or fraud. It
is admitted the fact that the present case is the case of negligence whereby the gross
negligency has been committed by Mona in performing her duties with due care and
diligence. It is pertinent to discuss here that for proving the negligence on the part of the
Accountants, the person should prove negligence such as the duty of the care existed with the
accountant, the duty of care which was required to be made was breached, the person
suffered the great injury and lastly the injury was due to the breach of the duty of care.
That it is the well-settled law that the Certified Public Accountants is having the duty of care
towards their clients as well as the third party who secured loans to the firms based on the
audit report of Certified Public Accountants. That the Securities Act of 1933 mandates the
company to enroll with the Securities and Exchange Commission which should include the
audited financial statements and other disclosures and if that statements found to be
misleading or misrepresented then the company as well as the auditor (Certified Public
Accountant) would be held liable. It is furthermore relevant to mention here that the to make
out the liability, the security purchaser or the creditor only requires to prove that the loss was
constant and it was due to the misleading statement and further they need not the show that
the reports were negligent (Chaveerug & Leemanonwarachai, 2013). On the other side, the
auditors to avoid the liability the CPA’s should prove that the financial statement, as well as
audit report, was prepared with due diligence and the loss was not caused by the financial
statement. That in Ernst & Ernst v. Hochfelder 425 U.S 185 (1976), it was specifically
observed that the plaintiff is required to prove the intention of deceiving, manipulation or
defraud and to avoid the liability the Certified Public Accountants are required to prove that
they are not guilty of misrepresentation or negligence. But in the present case, it was proved
that the creditors are suffering due to the negligent act of the CPA as being totally aware of
the financial condition of the corporation, Mona did not show the exact report in their
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Liability of CPA
financial statement on the basis of which, the loan was disbursed to the corporation
("Financial Statements", 2012).
Further, the Rule 102(e) of the Security and Exchange Commission deals with the "improper
professional Conduct" as in the present case, she was required to do properly. In the present
case, she had the duty to care and prepare a report in a proper professional way so; it might
not cause any loss to the investors as well as other creditors. It is further submitted that the
Rule 102(e) of the Commission Rules have three different definitions (Brown, 2015). The
first is known as the intentional or knowing conduct which also includes the reckless conduct.
Reckless in the general sense means the intentional or wilful conduct.
Further, the section 10(b) of the Securities Act claims fraud. It is pertinent to mention here
that there are two types of negligence found in the 102(e) rules of the commission, the first is
the single/first instance of highly unreasonable which results into the violation of the
professional standards of the facts which the certified Public Accountant must know. The
second needs the showing of the repeated examples of the unreasonable conduct which
results in the violations of the admitted professional standards and should show the nonability
to practice before the commission.
CONCLUSION:
In the end after going through the facts and circumstances of the case and after considering
the legal aspect of the case, it is concluded that Mona, the newly licensed Certified Public
Accountant is liable for the gross negligence and deficiency of care was proved on the part of
CPA. It is concluded that as it was a duty of the CPA to maintain the financial statement and
further she was aware that her statements were circulated in the bank for securing loan
though the exact name of the bank was not known to her, but it does not make the effect on
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Liability of CPA
the liability of CPA. The law is very clear on this point that if there is negligence or lacks in
the duty of care on the part of CPA, then the third party is liable to recover from the CPA as
well as the company because the credit was sanctioned on the report of CPA (Miller & Nouri,
2015).
SOLUTION 2:
INTRODUCTION:
The registration statement is the set of documents which includes the prospectus of the
company should be filed with the SEC before issuing the public offer. That the Certified
Public Accountant (CPA) is duty bound to prepare the registration statement subject to the
reasonableness of disclosures and got freedom from the material misstatements which are
accepted to the generally accepted accounting principles. The duties and liabilities of
Certified Public Accountants are fixed under the Securities Act of 1933 and the Securities
Exchange Act of 1934. Various CPA’s have faith that they could not be held liable under the
laws as their practices had not involved the securities. It is further relevant to mention here
that Section 5 of the Securities Act, 1933 that the investors who purchase securities by the
statements would sue the accountants for any losses suffered. Further Section 10(b) of the
SEA of 1934 and Rule 10b-5 of the said act prohibits the deceptive devices.
LIABILITY OF CHARLENE:
That the accountants at the time of performing their services should comply with the
Generally accepted accounting principles, in short, known as "GAAP" and Generally
accepted auditing Standards, in short, known as "GAAS." It is furthermore submitted that the
Financial Accounting Standard Board considers the accounting conventions, rules and
procedures constitute Generally accepted accounting principles at a given point in time.
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Liability of CPA
Generally accepted auditing Standards was established by the AICPA which set forth the
professional qualities. It is the general practice that if the accountant would follow the
procedures and rules set forth in the by the said boards, then they never are held liable for
negligence. The violation of any of the Generally accepted accounting principles, in short,
known as "GAAP" and Generally accepted auditing Standards, in short, known as "GAAS"
prima facie established the negligence on the part of the accountants. As per Section 11 of the
Securities Act, 1933, the auditor is liable to buyers for the securities of any wrong statements
of the material facts or any misleading statements about the financial statements on which the
auditor reported. In the present case, Charlene formed the registration report which faces the
many misleading statements (Parrino, Schwab & Wertheimer, 2015). But the only remedy
available to Charlene is to prove that she had performed her act with due care and diligence
and it was the fault on the part of the corporation who did not provide the information which
is the basis of the report. As it is clear from the facts that she tried her level best to find out
the information but could not able to find the same. It is furthermore relevant to mention here
that the investors should prove that they invest in the company after reading the report and by
that report they invest in the company. In Herzfeld v. Laventhol, Krekstein, Horwath &
Horwath, 378 F. Supp. 112, aff'd 540 F.2d 27 (2d Cir. 1976), the Hon’ble Court had
specifically held that the plaintiff should establish that he or she actually relied on the
financial statements (Sagarino & Corpuz, 2011).
Further in re John J. Aesoph and Derren M. Bennet the securities and Exchange Commission
of India had penalized the two auditors for the professional improper conduct under Rule
102(2) of commission. It is furthermore submitted that it was specifically observed that the
professional auditors failed the audit of the Nebraska based bank who credit the millions of
dollars as a loan and suffered a loss during the financial crisis. While deciding the matter, it
was held that the auditor is the duty-bound to make the report with due care and diligence
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Liability of CPA
rather than to merely relying on the management's statements (Farrall, 2014). Moreover, in
Re Brian Liab, the management had made the false representations which become the subject
matter of the litigations and enforcement actions and after that under Rule 102(e) of the
Commission Rules, the auditors were charged for not founding the misrepresentations. It is
always the mater of the great debate that in view of the aforesaid circumstances, when and to
what extent the auditor is held liable for the improper professional conduct but the answers
are covered under Rule 102(e) of the commission rules. It is further submitted that on one
side the duty of the auditor is to check whether the representation made by the management is
correct or not and on the other hand, the management is also responsible for the contents of
the financial statements and they are also required to provide the accurate and complete
information required for the financial statements.
CONCLUSION:
In the end after going through the facts and circumstances of the case and after considering
the legal aspect of the case, it is concluded that Charlene, the newly CPA licensed has not
violated any of the provisions of the Securities Act as well as Securities Exchange Act. It is
further concluded that the Charlene is not liable to any investors as she performed her duty
with due care and there is no negligence on her part. Further, from the facts of the case, it is
prima facie established that the investors never read the financial statement and without
reading the financial statement if they invest in the corporation then the auditor is not liable
as reliance is made on the above-stated case law (Schoenfeld, Segal & Borgia, 2017). So,
after considering the facts, the Charlene is not liable to investors as well as SEC and the
defense available to Charlene is prove that she performed her duties with due care.
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Liability of CPA
SOLUTION 3:
INTRODUCTION:
That the Certified Public Accountant (CPA) is duty bound to perform the assured services of
financial audit subject to the reasonableness of disclosures and got freedom from the material
misstatements which are accepted to the generally accepted accounting principles. The duties
and liabilities of Certified Public Accountants are fixed under the Securities Act of 1933 and
the Securities Exchange Act of 1934 (Whitman, 1973). While providing the services as an
accountant or the auditor, the Certified Public Accountants have the duty of care towards
their clients as well as towards the third party. It is furthermore submitted that as per the
Australian laws of 1933 and 1934, the Certified Public Accountants can be sued for the
negligence in performing their duties. It is relevant to mention here that if the opinions of the
Certified Public Accountants affects their clients as well as the investors, stock holders,
creditors of the firm or the partners then they may be liable to compensate them for the
misleading statements or report (Strasser, 2016).
LIABILITY:
That the facts of the case clear that the Roman misrepresented the actual information in
preparing the proxy statement which attracts the offense of fraud under the Government
Regulations. It is submitted that the fraud is discussed in two parts first as Actual Fraud
which is defined as the when the accountant intentionally states the wrong facts to mislead
the client and after that the client is injured due to the misrepresented facts of the accountant.
The second one is the constructive fraud whereby the liability arises as the accountant has the
duty towards the client and violates the same by making the misrepresentations. It is
furthermore submitted that the client should rely upon the professional misstatements to get
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Liability of CPA
the claim for damages. From the circumstances of the present case, it is prima facie
established that Roman has committed the fraud with the person who replies upon the
financial statements and invested their hard earned money. As per Rule 10b of the Act
prohibits the deceptive devices. As per Section 11 of the Securities Act, 1933, the auditor is
liable to buyers for the securities of any untrue statements of the material facts or any
misleading statements about the financial statements on which the auditor reported ("The
Securities Act of 1933", 1933). It is submitted that from the facts of the case, it is prima facie
established that the negligence is on the part of Roman. It is further submitted that Roman
due to lack of time used the financial report of last year though his duty was to prepare the
proxy report with due care and diligence, but he was failed to do so. . A group of Cardozo
investors who bring a class action lawsuit in Federal District Court against Ramon's firm
under the 1934 Securities Exchange Act is legally justified on their part as they invest their
hard earned money in the investments relying upon the reports issued by Roman (Wen, Hao
& Bu, 2015). They have the remedy to claim their loss from Roman as it was due to the
negligent act of Roman. Similarly another group of investors who filed a civil lawsuit for
monetary damages against Ramon, under the same set of facts, in the 11th Judicial Circuit
Court for Miami-Dade County are also justified as the loss occurred due to the negligence of
Roman, and it is the well-settled law that due to negligent act of the others why the other
innocent persons would suffer (Martin, 1974).
That in First Florida Bank Vs. Max Mitchell and Co., the Supreme Court of Florida had
held that when the accountant had failed to exercise the reasonable care in preparing the
financial statement and relied upon that statements, the investors invest the money, then the
accountant should be held liable to the third party for the negligent act. In this case, the
petitioner bank had secured the loan to the respondent company after relying upon the
financial statement of the Certified Public Accountant but later on it came to the knowledge
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Liability of CPA
of the petitioner bank that the financial status of the company is not that as shown in the
financial statements ("The Supreme Court and Due Process of Law in Florida", 1940).
Thereafter the bank sued the accountant of the company before the Circuit Court,
Hillsborough county Marrion Buck as the loan was disbursed after relying upon the financial
statements prepared by the accountant of the company whereby the court had delivered the
judgment in favor of the accountant to which the bank appealed in the District Court of
Appeal who also confirmed the judgment delivered by the Circuit Court. Thereafter the bank
appealed the same in the Supreme Court of Florida whereby, the Supreme Court held that
when the accountant fails to exercise the ordinary care in preparing the financial statements
of client and also personally delivers and presents the statements to the other party for
securing loan then the accountant is held liable to the other parties for the negligent act and
the case was remanded back to determine the question of liability.
CONCLUSION:
In the end, after going through the facts and circumstances of the case and considering the
settled prepositions of law, it is concluded that due to the negligent act of Roman, all the
investors are suffering and Roman is liable for filling the Proxy Statements in SERC with the
wrong facts. It is further submitted that Roman must act with care and due diligence and the
excuse of lack of time is no excuse, and it is the duty of Roman to provide the exact and
correct report with the SERC as well as investors (Strasser, 2016). From the perusal of
Securities Exchange Act, it is prima facie established that the investors can sue Roman for
claiming their compensation as the loss suffered by them due to the negligent act of Roman.
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Liability of CPA
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Liability of CPA
Parrino, R., Schwab, D., & Wertheimer, D. (2015). US Supreme Court clarifies liability
standard under Section 11 of the Securities Act of 1933 for statements of opinion in
registration statements. Journal Of Investment Compliance, 16(3), 37-42.
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Whitman, M. (1973). Merger Proxy Statements and Exchange Prospectuses—Suggestions for
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Liability of CPA
Brown, J. (2015). Comment on Rule 14a-8(i)(9), Securities and Exchange Commission, June
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Farrall, J. (2014). Rule of Accountability or Rule of Law? Regulating the UN Security
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