Enron

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Under the common law, accountants may be found liable to the clients who hire them under several legal theories, including breach of contract, fraud, and negligence.

Accountants owe a duty to use reasonable care, knowledge, skill, and judgment when providing auditing and other accounting services to a client. In other words, an accountant’s actions are measured against those of a “reasonable accountant” in similar circumstances. The development of GAAPs, GAASs, and other uniform accounting standards has generally made this a national standard.

An accountant who does not comply with GAASs when conducting an audit and thereby fails to uncover a fraud or embezzlement by an employee of the company being audited can be sued for damages arising from this negligence.

There are three major rules of liability that a state can adopt in determining whether an accountant is liable in negligence to third parties.

1.The Ultramares doctrine
2.Section 552 of the Restatement (Second) of Torts
3.The foreseeability standard

Ultramares doctrine is a rule which says that an accountant is liable only for negligence to third parties who are in privity of contract or in a privitylike relationship with the accountant. It provides a narrow standard for holding accountants liable to third parties for negligence.

Section 552 of the Restatement (Second) of Torts provides a broader standard for holding accountants liable to third parties for negligence than the Ultramares doctrine. Under the Restatement standard, an accountant is liable for his or her negligence to any member of a limited class of intended users for whose benefit the accountant has been employed to prepare the client’s financial statements or to whom the accountant knows the client will supply copies of the financial statements.

A few states have adopted a broad rule known as the foreseeability standard for holding accountants liable to third parties for negligence. Under this standard, an accountant is...
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