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Holding the accountant accountable: accountants' underhanded dealings can have far-reaching effects. Although third parties don't have privity relationships with accountants, they can file claims alleging fraud, misrepresentation, and securities law violations.

Article Excerpt
People hire accountants expecting to associate with professionals who exhibit reasonable care and competence. Accountants' failure to discharge their duty as skilled professionals subjects them to liability for negligence. The laws of the various states do not differ in this regard. (1)

The ability to hold an accountant accountable turns largely on whether the aggrieved client is in a contractual, privity relationship with the accountant. Like any other professional, an accountant owes no duty of care to third parties. The ability to seek general negligence damages on behalf of your third party client may also depend on the scope of the contractual relation ship--and a well-pleaded complaint that carefully outlines the standards the accountant violated.

However, reasonable care and diligence do not equal infallibility. (2) When accountants are contracted to perform particular tasks, their obligation is not limited to the exercise of ordinary care, rather it be comes an affirmative and specific duty, outlined by the contractual obligation to which both parties agreed. (3) Holding an accountant accountable for negligent or intentional conduct is easy if your client has a contractual, first-party, privity relationship with the accountant: An action for professional negligence, fraud, misrepresentation, and, in some states, breach of fiduciary duty can be alleged.

Third-party claims against accountants are more difficult. They are limited to fraud, misrepresentation, and securities law violations and may be supported by the Sarbanes-Oxley Act of 2002, which establishes corporate and criminal fraud accountability for certain willful violations. (4) Third-party claims may require evidence of fact specific conduct and relationships between the third party and the accountant or auditor. For example. Is the third party a known and intended beneficiary of the accountant's work product? Are the accountant's misrepresentations or omissions material? Did the accountant act with the requisite state of mind--that is, either intentionally or recklessly?

The prima facie elements of accounting negligence or malpractice are

* the accountant's duty to use the skill, prudence, and diligence that other members of the profession commonly possess and exercise

* breach of that duty

* a proximate causal connection between the negligent conduct and the resulting loss

* actual loss or damage resulting from negligence. (5)

Professional standards might allow--in some cases, compel--an accountant to resign for good cause, regardless of potential adverse effects on the client's interests. Lack of cooperation from the client's management, the accountant's loss of faith in a client's integrity, and undue influence from a client--which compromises the accountant's independence--all support good cause for resignation. (6)

Industry standards provide a basis for pleading and defending the duty element of a professional negligence claim. In addition to your state's corporate, business, and professions laws, consider these rules:

Accounting principles. The Financial Accounting Standards Board's Generally Accepted Accounting Principles offer guidance on how accountants should conduct their work. They also aim to standardize the...

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