Accountant's Liability to Third Parties

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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


Works Cited

This research paper analyzes the degree of an auditor's liability to clients and third parties under applicable law.
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At that time, courts began to expand the world of potential claimants in negligence cases beyond the client and the intended third party. The Restatement of Torts, Section 552 created a broader rule by expanding liability to include claims brought by a limited group of persons for whose benefits and guidance the accountant intends to provide the information. Over time, the Restatement rule has replaced the Ultramares doctrine as the majority rule. The most expansive view of accountant liability, adopted by some states, was the foreseeability doctrine, which allows nearly anyone who suffers a loss as a result of an accountant's negligence to be a potential claimant, as long as that person's reliance was foreseeable to the accountant. The mid-way doctrine of balancing-factors allows a subjective approach to the matter by examining each case separately and weighing all the different factors subjectively.
The fourth section of this paper summarizes accountant liability imposed by statutory law. The most significant source of potential liability for accountants, especially those who perform work for public companies, is the liability imposed by federal statutes. Federal legislation of accountants began after the 1929 New York Stock Exchange crash, with the enactment of the Securities Act of 1933 and the Securities Act of 1934. This historic crash led to the Great Depression and an era of economic destabilization
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