[Anonymous]

Becker Question –

While doing the homework for R7 CPA Legal Liability I ran across a multiple choice whose answer seems to contradict what I have learned in the chapter (as well as the answer of another multiple choice question).

QUESTION 1:

Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen’s net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen’s default. Which of the following must Mac prove in order to recover?

I. Beckler was negligent in conducting the audit.

II. Mac relied on the financial statements.

a. Neither I nor II.

b. II only.

c. I only.

d. Both I and II.

Explanation

Choice “d” is correct. Although a CPA generally is liable to third parties only for fraud or constructive fraud (gross negligence), where the CPA knows that the third party will be relying on the audit, the CPA can be liable to the third party for mere negligence (the CPA owes the third party a duty of care since the third party is an intended beneficiary of the engagement). An action for negligence requires both reliance on a misstatement and negligence.

I said that choice C (that Mac must simply prove that Beckler was negligent to recover) is the correct answer. The chapter of R7 states that the elements of ordinary negligence are: duty of care, a lack of duty of care (i.e. negligence), that caused the plaintiff’s injury, and the plaintiff suffered damages. Later in the homework I ran across this question whose answer is D – reliance:

QUESTION 2:

A client suing a CPA for negligence must prove each of the following factors, except:

a. Proximate cause.

b. Breach of duty of care.

c. Injury.

d. Reliance.

Can anyone please help me and tell my why in the first question Mac must prove both negligence and reliance? I recognize that had this been a question of gross negligence then reliance must be proven, but the question does not seem to indicate gross negligence.

Thank you in advance for your help!

[mangos]

Second question relates to the client suing the CPA.

First relates to a third party suing the CPA. For a third party to be able to sue, they had to have relied.

FAR (5/07/13): 96

[Anonymous]

The answer choice (d) is correct. It is because, in case of Negligence by CPA, first of all the plaintiff needs to prove that the CPA was negligent, i.e., he did not excercise Due Diligence. Also the plaintiff Should have Relied on the financials, and another point, should have suffered damages. How can there be any damages if the plaintiff did not RELY on the financials.

Hope this helps.. 🙂

[barelystayingsane]

Mangos is exactly right. If the plaintiff is the client, he/she is only required to prove those four elements of negligence. If the plaintiff is a third party, he/she must prove those four elements AND reliance.

[Author]

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