Chapter 49: Accountant

1

• Chapter 49 Accountants Liability and Malpractice

2
What Constitutes Malpractice?

• When a contract requires a party to perform
  services, the party must perform with the care
  exercised by persons performing similar services
  within the same community.
• If the party negligently fails to observe those
  standards, there is both a breach of contract and
  a tort.
• This tort of negligent breach of contract
  constitutes malpractice, and the other party to
  the contract can sue the wrongdoer either for
  breach of contract or for the negligence
  involved.

3
Malpractice
Malpractice consists of both
Plaintiff bringing suit for malpractice may
choose which action to pursue
4
Differences
Can Be Greater Than Contract Law Damages
Limited by Contract
Runs from Date When Harm Was Discovered
Runs from Date When Contract Was Broken
5
Third Person Suits

• In the modern view, third persons may also sue
  the wrongdoer for malpractice.
• When the malpractice suit is brought against an
  accountant for negligence, courts differ as to
  when a third person may sue and what the
  plaintiff must show to bring such a suit.
• Liability is evaluated by one of these rules
• Privity Contact
• Known User Foreseeable User
• Intended User Flexible
• Unknown User

6
Theories of Liability

• Some courts refuse to let the third person sue
  these courts require PRIVITY between the parties.
  
• In New York, sufficient CONTACT with the third
  party can make the accountant liable just as if
  there was privity.
• In some states, it is sufficient that the third
  person was a KNOWN USER of the accountants
  information.

7
Theories of Liability (contd)

• Some courts go allow third parties to sue if it
  was REASONABLE TO FORESEE that the third party
  use the accountants information.
• Some courts limit suit to those nonprivity
  plaintiffs who were INTENDED to rely on the
  accounting work.
• A few courts use a FLEXIBLE approach, deciding
  each case as it arises.
• Finally, an accountant is not liable to a
  non-privity UNKNOWN party when the accountant has
  no knowledge of any way the party could be
  affected.

8
Liabilities
9
Protection From Liability

• To a limited degree, an accountant is protected
  from malpractice liability by
• A clear, conspicuous disclaimer of liability, or
• The contributory or comparative negligence of the
  plaintiff.

10
Fraud

• When an accountant is guilty of fraud, the
  intended victim of the fraud may sue the
  accountant even though privity of contract is
  lacking.