Common Law - Kent PDF

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Common Law- law that has developed through court decisions; it represents judicial interpretation of a society's concept of fairness. For example, the right to sue a person for fraud is a common law right. What are the three sources of accountant’s liability under Common Law? - Common law - liability develops through case decisions generally arising due to (1) breach of contract, (2) negligence, and (3) fraud (Common law) What are two types of negligence? 1. Ordinary negligence: violation of a legal duty to exercise a degree of care that an orinary prudent person would exercise under similar circumstances 2. - Gross negligence: lack of slight care, indicative of a reckless disregard for one's professional responsibility (Common Law) Fraud- Defined as misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with the intention of deceiving the other party and with the result that the other party is injured. (common law) Constructive fraud- Performing duties with such recklessness that a persons believing the duties to have been completed carefully are being misled. Gross negligence = constructive fraud (Common law) Breach of contract- Failure of one or both parties to a contract to perform in accordance with the contract's provisions. A public accounting firm might be sued for breach of contract, for example, if the firm failed to perform the engagement in accordance with the engagement letter. Negligence on the part of the CPAs also constitutes breach of contract. (Common Law - Elements) To establish CPA liability, a client must prove the following elements: (1) Duty - The CPAs accepted a duty of due professional care to exercise skill, prudence, and diligence. (2) Breach of duty - violated terms of engagement or professional standards (3) losses - The client suffered losses. (4) Causation (proximate causation) - losses were caused by CPAs negligent performance - Plaintiff has the burden of proof (common law) Under Ordinary negligence the CPA will have three types of liabilities 1. Known User - Ultramares (privity doctrine) 2. - Foreseen User - Restatement approach (of Torts) 3. - Foreseeable User - Rosenbloom Ultramares approach (Known user approach)- The auditors knew that the audited financial statements were for use for a particular purpose by a known user (third-party beneficiary) Ultramares v Touche & CO- A common law decision by the New York Court of Appeals (New York's highest court) stating that auditors are liable to third parties not in privity of contract for acts of fraud or gross negligence, but not for ordinary negligence. Conflicts with precedents established by the Restatement of Torts and Rosenblum approaches to liability. Restatement approach (foreseen user approach)- The auditor knew the audited financial statements were for use for a particular purpose, but the auditors did not necessarily know the specific user (e.g., the financial statements were known to be for use in helping to sell the business to an unidentifiable purchaser.) Second Restatement of the Law of Torts-A summary of tort liability, which when applied to auditor common law liability, expands auditors' liability for ordinary negligence to include third parties of a limited class of

known or intended users of the audited financial statements. Conflicts with the precedents established by the Ultramares and the Rosenblum approaches to liability. Rosenblum approach (foreseeable user)- The auditors should have realized that it was reasonably foreseeable that the financial statements would be used by this user. Rosenblum v Alder- A common law decision by the New Jersey Supreme Court that holds CPAs liable for acts of ordinary negligence to "reasonably foreseeable third parties" not in privity of contract. Conflicts with the precedents established in both the Ultramares and the Restatement of Law of Torts approaches to liability. Credit Alliance Corp. v. Arthur Andersen & Co.- A common law decision by the New York Court of Appeals (New York's highest court) stating that auditors must demonstrate knowledge of reliance on the financial statements by a third party for a particular purpose to be held liable for ordinary negligence to that party. Basically, this case upheld the Ultramares v. Touche & Co. rule. Third-party beneficiary- A person, not the auditors or their client, who is named in a contract (or known to the contracting parties) with the intention that such person should have definite rights and benefits under the contract. typical case -third party seeks to establish that it sustained a loss caused by relying on misleading financial statements which included an audit report that was inadequate -gross negligence will establish liability -ordinary negligence depends on jurisdiction

Under which common law approach is an unidentified third party least likely to be able to recover damages from a CPA who is guilty of ordinary negligence? – Ultramares Approach Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?- Rosenblum Under common law rules, a claimant suing a CPA firm based on an audit of financial statements must prove each of the followinga loss was sustained, reliance upon the audited financial statements was a proximate cause of the loss, the auditors were guilty of either ordinary or gross negligence depending upon the claimants recover rights.

If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for: Gross Negligence...