Week 2 Project BUS3055

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Week2Notes2.docx

The liability of professionals to their clients is based on contract law and negligence. For accountants and lawyers, additional obligations and liabilities are imposed by codes of ethics and licensing.

Contractually, a professional owes a duty to a client to honor the terms of the contract, which may include time constraints, fee limitations and scope of work. It is imperative that these terms be discussed in advance and carefully worded to avoid ambiguity in interpretation. Failure to perform as per the contract will subject the professional to damages incurred by the client as a result of the professional’s breach.

Negligence involves a duty of care, which if breached results in economic harm to the client. The duty of care is not spelled out in a contract but includes the standard of care, knowledge and judgment generally accepted by the members of a profession, as well as standards imposed by codes of ethics or licensing requirements.

A significant source of concern for accountants is the Sarbanes-Oxley Act of 2002. This act imposes requirements on a public accounting firm providing auditing services to a company:

· that has securities registered under Section 12 of the Securities Exchange Act of 1934

· is required to file reports under Section 15(d) of the Securities Exchange Act of 1934; or

· files a registration statement not yet effective under the Securities Exchange Act of 1933.

The Sarbanes-Oxley Act provides numerous regulations for public accountants preparing financial statements for publically traded companies. One regulation is that public accountants cannot perform both audit and non-audit services for a client. Non-audit services include bookkeeping, appraisal or valuation services, management functions, investment-advising services and others.

Accountants can be liable to clients for committing fraud. The elements of fraud include:

1. misrepresentation of a material fact

2. intent to deceive

3. reliance on misrepresentation

4. actual injury to innocent party

An accountant commits actual fraud if he or she intentionally misstates a material fact and a client reasonably relied on the fact. The accountant commits constructive fraud if he or she is grossly negligent in the performance of said duties.

Example:

In the case of Bernie Madoff Securities, the auditor signed off for years on financial statements that made the firm seem solvent when in fact the company had lost $50 billion.

The SEC charged the auditors with securities fraud, claiming they represented that audits were conducted when in fact, the audits had not been completed (SEC, 2009).

One accountant avoided prison because he cooperated with authorities, admitted he just signed off on things Madoff gave him and showed genuine remorse. Others received sentences from 2 to 10 years (Goldstein, 2015).

U.S. Securities and Exchange Commission (2009). SEC charges Madoff auditors with fraud. Retrieved from

https://www.sec.gov/news/press/2009/2009-60.htm

Goldstein, M. (2015). Madoff accountant avoids prison term. Retrieved from Madoff Accountant Avoids Prison Term

http://www.nytimes.com/2015/05/29/business/dealbook/madoff-accountant-avoids-prison-term.html?_r=0