Comprehensive Volume, 18th Edition

Chapter 49: Accountant’s Liability and Malpractice

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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.

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Malpractice

Breach of Contract

Accountant (party to contract) fails to

fulfill duties.

Tort

Accountant is negligent or

commits fraud.

Plaintiff must showthat defendant’s

breach was negligentor willful.

Malpractice

Breach of Contract

Tort

Malpractice consists of both:

Plaintiff bringing suit for malpractice may choose which action to pursue:

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Differences

Can Be Greater ThanContract Law Damages

Runs from Date WhenHarm Was Discovered

Limited by Contract

Runs from Date WhenContract Was Broken

BREACH OF CONTRACT

In choosing which action to pursue, a plaintiff may consider:

TORT LIABILITY

Damages

Statue ofLimitations

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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

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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 accountant’s information.

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Theories of Liability (cont’d)

Some courts go allow third parties to sue if it was REASONABLE TO FORESEE that the third party use the accountant’s 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.

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Liabilities

Liability for

Malpractice (Tort)

Statutory Violations

Breach of Contract

InterloperNo liability to

Contacts

Foreseeable User

- Differing DecisionsKnown-User

Beneficiaries of Statutory Protection(Section 11-1933 Act

Section 10b-1034 Act)Liability to

Anyone in Privity of Contract

Client

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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.

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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.