Accountant's Liability to Third Parties

Table of Contents

Introduction Accountants' Liability to the Client and Third-Party
A) Breach of Contract
B) Ordinary Negligence (Accountant Malpractice)
C) Fraud
a. Constructive Fraud (Gross Negligence)
b. Actual Fraud

Accountants' Liability under Common Law for Third-Party
A) The Near-Privity Doctrine
B) The Restatement Doctrine
C) The Foreseeability Doctrine
D) The Balancing-Factors Doctrine

Accountants' Liability under Statutory Law – Third-Party
A) Securities Act of 1933
B) Securities Exchange Act of 1934
C) The Sarbanes Oxley Act
D) The RICO Act

Accountants' Deep Pockets

Conclusion

Works Cited

Introduction
This research paper analyzes the degree of an auditor's liability to clients and third parties under applicable law. Specifically, it focuses on accountants in their professional role engaged by contract to express an opinion about a company's financial statements and the professional commitment to exercise due care in providing those services. An accountant's failure to comply with the promised obligations can result in the accountant being held liable to clients for fraud, negligence, and breach of contract. In some cases, accountants may have a potential legal obligation to third parties as a result of not following established professional standards.
Accountant liability for the most part is based on contract, common and statutory law. Section 2 discusses the degree of liability accountant's face under a negligence standard. When an accountant performs work for a client a contract of employment is created, usually called an "engagement letter." The engagement letter specifies the work to be performed and the compensation to be paid. Because an accountant is an agent of his/her client, agency law also applies to the relationship. Under agency law, the accountant owes his/her client important duties, including competence in performing the work. The standard of competence used by the court is that of a reasonably competent accountant, which is

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