DESIGNING AND DELIVERING A COURSE ENTITLED "LEGAL REGULATION AND LIABILITY OF ACCOUNTANTS"

DESIGNING AND DELIVERING A COURSE ENTITLED “LEGAL REGULATION AND LIABILITY OF ACCOUNTANTS”

ROBERT A. PRENTICE*

INTRODUCTION

In a large number of institutions of higher education, accounting students- whether undergraduate majors, PPAs, or MPAs -form a significant percentage of the students serviced by business lawfiegal environment faculty. The services provided range from broad introductory courses in business lawfiegal environment to various elective courses’ to courses designed specifically to assist students in passing the law portion of t he CPA exam.

In the Fall of 1993, the University of Texas a t Austin first offered a new elective aimed specifically a t accounting students and moti- vated in substantial par t by the “litigation crisis” facing the accounting profession. This article (1) offers a rationale for the course, (2) discusses potential textbooks, (3) offers a detailed outline of the course as currently taught, (4) describes the nuts and bolts of a pedagogical approach, and (51 includes as attachments a syllabus and some sup- plemental materials that a r e used in teaching the course.2 The course has been taught twice. Obviously there will be much room for im-

* Smith Centennial Professor of Business Law, Graduate School of Business, University of Texas- Austin.

At the University of Texas, for example, we offer several undergraduate and graduate level electives that a re often taken by accounting students, including real estate law, law of trusts and estates, environmental law, corporation law, securities regulation, international law, commercial transactions, employment law, alternative dispute resolution, and ethics.

This article was inspired by an excellent article describing another promising course for business lawllegal environment. Arlen Langvardt. Designing a Legal Aspects ofMarketiny Course, 9 J. LEGAL STUD. EDUC. 379 (1991).

46 I Vol. 13 I The Journal of Legal Studies Education

provement and refinement, but this article offers a beginning for a much needed course in business schools.

RATIONALE FOR THE COURSE

Existence of a Liabili ty Crisis.

There is no doubt that the term “crisis“ aptly describes the liability situation for members of the accounting profession today. Most accounting students a t the University of Texas go to work initially for Big Six accounting firms. Those firms alone face more than $30 billion in unresolved claims in shareholder lawsuits? Recently, Ernst & Young paid $400 million to the federal government just to settle claims arising out of the S&L debacle; soon thereafter, Deloitte & Touche paid $312 million and KPMG Peat Marwick paid $186.5 million to settle similar claims: Such litigation has already caused the demise of one major accounting firm, Laventhol & H ~ r w a t h , ~ and it certainly threatens the existence of others, especially because the Big Six firms now find it very difficult to obtain insurance!

Students who seek a career in accounting cannot avoid this situation simply by avoiding careers with the Big Six. In California, between 1985 and 1991 lawsuits involving allegations of audit negligence against small and medium- sized firms - increased 30O0/o and those firms lost an average of $323,000 every time they were sued.? Because of dramatically increased premiums or actual unavailability, approximately 40% of these smaller firms are now without liability insurance?

Nor can students escape liability potential by pursuing careers in the tax area rather than audit. Although most of the largest judgments and settlements occur in audit-related litigation, fully half the

Marianne Lavelle, Lawyers and Accountants Hail Dodd- Domenici Bill, NAT’L L.J., May 9. 1994, at B1, B2.

Claudia MacLachlan, Peat Marwick Settles Suit in Th?$ Failures, NAT’L L.J., Aug. 22, 1994, at B1.

Dean Foust & Tim Smart, The Big Six Are an Big Trouble. BUS. WEEK., Apr. 6, 1992, at 78 (Laventhol & Horwath went out of business facing $2 billion in claims).

Michael Schachner, Big Six Losses Don’t A d d Up to Cover Crisis for Smell Firms, BUS. INS., Nov. 22, 1993, at 3 (“capacity has all but evaporated for Big Six firms, causing several to entirely self-insure.”).

’ J. Nils Wright, Leuyers Ease Up on CPAs Ajier Battle in Legislature, Bus. J. SACRAMENTO. Apr. 12. 1993, at 2.

Lawrence A. Weinbach. The Dollar Sob Question Behind US “Litigation Crisis.” FIN. TIMES, Sept. 23. 1993, at 27.

1995 I Designing and Delivering a Course I 47

lawsuits filed against accountants in the U S . arise from tax work? A career in consulting (management advisory serviceslexpert systems) is no more promising as a shelter from litigation. Consulting has already spawned several lawsuits,l0 and is predicted to be an area of increasing future litigation.“

The total cost of all this civil litigation against accountants is staggering. In 1992 alone, the accounting profession and its insurers in the U S . paid out $783 million in awards, settlements, and defense costs, a figure representing 14.3% of the industry’s revenue.12 In 1993, the profession’s total legal costs exceeded $1 bil1i0n.I~

Pursuing accounting careers abroad will not permit escape from the liability crisis either. Litigation against accountants has surged all over the world. One expert recently noted that “[a]ccountants in every single country are dealing with liability. It’s a hellish part of doing business today, but it is a part of doing business.”14

Regulatory action has increased along with civil litigation for damages. The SEC has set as a top priority for the 1990s the initiation of more enforcement cases in the areas of accounting and financial di~closure.’~ Additionally, there have even been criminal actions against accountants.16

Dan Goldwasser, State oj. the Accounting Profession, in ACCOCNTANTS’ LIABILITY 15 (PLI 1994)C’. ..almost 5Ooh of all claims made against CPA firms arise out of tax engagements even though those claims do not give rise to 50% of the damages sustained by the profession from liability claims.”).

For example. on June 2, 1994, a jury returned a $14.2 million verdict against Ernst & Young in litigation arising out of defendant’s provision of litigation-support services. Don J. DeBenedictis, Experts Held Accountable, NAT’L L.J., June 20, 1994, at A6.

” Linda B. Specht, et. al., The Public Accounting Litigation Wars: Will Expert Systems Lead the ~Vmt Assault?, 31 JURIYETAICS J. 247 (19911.

i2 Tort Reform Is a Quid Pro Quo, Congressional Leaders Suy, THOMSON’S INT’L BANK ACCT., June 21, 1993, at 1.

l 1 Donna K.H. Walters, Accounting Firmc M u s t Watch Their Ps and Qs, L.A. TIMES, June 4, 1994, at D2.

Bill Morrison, Chairman of the UK’s Auditing Practices Board, Fated in World C,’orqress Report, WORLD ACCT. REP., Nov. 1992.

Securities Law Daily IBNA) (Nov. 10, 1992) (quoting SEC Enforcement Director William McLucas).

E.g., U S . v. Parris, 1993 U.S.App. LEXIS 1448 (10th Cir. 1993Naffirming conviction of accountant for federal mail and wire fraud violations: U.S. v. Simon, 425 F.2d 796 (2d Cir. 1969), cert. den.. 397 US. 1006 (197O)(affirming mail fraud conviction of accountant notwithstanding accountant’s compliance with GAAP and GAAS); U.S. v. Franklin, 328 F.2d 854 (2d Cir. 1964)(confirming conviction of accountant for conspiracy to sell unregistered securities); U.S. v. Crowell, 92-CR139-A (N.D.Tex. 1993Xaccountant sentenced to 20 years imprisonment on conviction of securities fraud, wire and mail fraud, money laundering, and interstate transportation of money obtained by fraud).


Thus, it is probably not just hyperbole for academics to declare that “This is the biggest crisis the [accounting] profession has faced in its history.”17 These developments have naturally had a major impact on the profession. A very high percentage of accountants feel personally vulnerable.1s Some are turning down once-coveted partnership status in order to avoid the attendant liability.’O Capable accountants have left the profession and qualified young people are afraid to pursue an education in accounting because of the threat of professional liability.”

Implications for Education.

This course offers several important benefits to future accountants. First, it gives them an accurate picture of the litigation perils that they will face in their careers. Students pursuing an accounting education need to understand the dimensions of the accounting litigation crisis. As Professor Susan M. Koniak has observed, accounting schools “need to have courses in the potential liabilities of accountants in concrete situations-not to moan about what happened, but to illustrate that this is t h e standard the rest of society is going to hold them to.”21 This course provides these illustrations and might well be called “Accountants’ Introduction to Reality 101.”

Accounting students also deserve to learn of the significant bright spots on the horizon, including favorable court decisions,22 positive legislative reform at the state level,= and a promising push for reform

Foust & Smart, supra note 5, a t 78 (quoting John W. Hill, assistant professor of accounting a t Indiana University).

lB USA: Litigation Threatens Change of Attitude Among Accountants, ACCOUNTANCY, Feb. 6 , 1991, a t 12 (81% of accountants surveyed felt personally vulnerable and 73% felt the need for liability protection to increase in the future).

Alison Leigh Cowan, The New Letdown: Malcing Partner, N.Y. TIMES, Apr. 1, 1992, a t D1.

2o David C. Walters, Liability Risk Worries Accounting Recruits, CHRISTIAN SCIENCE MONITOR, Dec. 28, 1992, a t 9.

21 John H. Cushman, Jr., Bank Failures Rake a Qwstion: Who Does the Final Audit?, N.Y.TIMEs, Dee. 6, 1992, at See. 4, p. 6.

22 See, e.g., Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 114 S.Ct. 1439 (1994Weliminating aiding & abetting liability under Rule lob-5 of 1934 Securities Exchange Act); Reves v. Ernst & Young, 113 S.Ct. 1163 (1993Hdrastically reducing accountants’ exposure t o liability under RICO); Lampf, Pleva, Lipkind, Prupis & Pettigrow v. Gilbertson, 111 S.Ct. 2773 (199lkeducing statute of limitations for 1Ob-5 suits); Pinter v. Dahl, 486 U S . 622 (1988)(virtually eliminating accountant liability under Sec. 12 of the 1933 Securities Act); Bily v. Arthur Young & Co., 834 P.2d 745 (Cal. 1992Mleading trend toward restricting accountants’ third-party liability in negligence actions).

23 For example, most states have eliminated traditional joint and several liability,

1995 I Designing and Delivering a Course I49

legislation a t the federal l e~e1 .2~ Although animated by the litigation crisis, this course offers several

other benefits to accounting students. A second feature is presentation of literally hundreds of case studies of audit failures, tax errors, and other accounting miscues. Many of these cases involve significant ethical lapses as well. There is perhaps no bet ter way to learn than from others’ mistakes. Often, legal and ethical errors are not the result of premeditated intent to do wrong; rather, they result from inattention to applicable legal and ethical standards. By highlighting the consequences of intentional wrongdoing, this course might well deter such wrongdoing. More importantly, it will alert the well- meaning young accountant as to errors others have made in a wide variety of circumstances so that those errors will not be repeated. Through discussion and analysis of so many cases illustrating the pitfalls of their predecessors, the course will bet ter equip students with the tools needed to avoid potential liability in their future professional careers.

Many believe that this case approach is one of the very best ways to teach a c c ~ u n t i n g . ~ ~ Further , the teaching of ethics is a major concern to the accounting industryF6 Every class period in this course presents several opportunities to teach important ethical concepts.

Third, by introducing students t o the essentials of legal reasoning, this course equips them with a problem-solving technique that will serve them in good stead throughout their careers. Professor Dan Subotnik has argued that accounting education is deficient in that it too often focuses upon mathematically precise answers to hypothetical

passed limited liability company and/or limited liability .partnership legislation, or made various other favorable changes. See generally, Dan Goldwasser, Stute Legislative Initiatives on Behalf of the Accounting Profession, ACCOKNTANTS’ LIABILITY 143-178 (PLI 1994).

24 Stephen H. Miller, AZCFA A.nrumnces Major fnitintive to Strengthm E’inunciul Reporting und Further Tort Reform Prospects, J. ACCOUNTANCY, Aug. 1993, a t 15.

?’ Robert J. Sack. former chief accountant of the Division for Enforcement at the SEC has emphasized the importance of immersion into actual cases for accounting students:

It seems to me that there is a close analogy between the education of a medical doctor and the education of a professional accountant. [The] objective of a medical autopsy is simply to learn what went wrong, and to make a judgment as to what might have been done differently. The medical profession tries to learn from those failures, t o expand its list of answers. Unfor- tunately, the financial reporting process sometimes fails too.. . .We must find a way for accountants to use those financial reporting failures in the expan- sion of our knowledge base.

HOWARD M. SCHILIT, FINANCIAL SHENANIGANS xi-xii (1993).

sponse, 11 J. BUS. ETHICS 485 (1992). 28 Stephen E. Loeb & Joanne Rockness, Accounting Ethics and Educution: A Re-

50 I Vol. 13 1 The Journal of Legal Studies Education

questions without recognizing the complexities and vague areas of actual practice.n Subotnik believes that exposure to legal cases and legal reasoning has real value in teaching judgment skills to accounting students:

Like accounting, law is commonly construed in our culture as requiring generally applicable principles and, in the end, a single binding solution. Nevertheless, our conception of law also admits, in its very essence, the existential reality of differences in human interpretation and the consequent una- voidability of discretion - which is to say, subjective judgment in the resolution of those differences.28

Fourth, an incidental benefit t o the accounting student is the coverage this course provides of subject matters areas covered on the CPA exam. As will be noted, material covered in this course includes professional responsibilities (including AICPA Ethics and CPAs & the law) constituting approximately 15% of the exam, contract law constituting approximately 10% of the exam, business organizations constituting approximately 20% of the exam, and government regulation of business (including employment and securities law) constituting another 15% of the exam.29

Fifth, a thorough knowledge of the issues will make these students more articulate and persuasive spokespersons for t h e types of judicial and legislative reforms the accounting profession desperately seeks3"

27 Dan Subotnik, What Accounting Can Learn F r m Legul Education, 2 ISSUES IN ACCT. EDUC. 313, 315 (1987)rOur [accounting] textbooks fail, by and large, to recognize the very existence of ambiguity as an element in accounting problems and solutions. The commercial world is full of transactions of remarkable originality and baffling complexity, but if you look a t accounting textbooks you will find virtually no illustrations, no homework problems, where solutions are not self-evident or fairly easily extrapolatable from the textbook material.").

s8 Id. a t 319. 29 See generally, IRVIN N. GLEIM & JORDAN B. RAY, CPA REVIEW: BUSINESS Law 1

(19941. As taught a t the University of Texas, the business organizations section receives relatively little attention as it focuses primarily upon two new forms of organization that may shelter accountants from liability they face in the typical partnership mode- limited liability companies and limited liability partnerships. See generally, Jan M. Rosen, In Business: Protecting Persmal Assets, N.Y. TIMES, Aug. 6, 1994, a t 30 (several Big Six firms are preparing to switch from general partnerships to limited liability partnershipsl.

3u See Robert R. Owen, Presidentaal Message, TODAY'S CPA, JullAug. 1994. at 6 (calling upon accountants to give individual effort to push tort reform).

1995 I Designing and Delivering a Course i 51

Coordination with Accounting Departmmts Several concerns can be raised about the addition of a course such

as this to a business school’s curriculum. This section presents some of those concerns in question form and attempts to provide satisfac- tory answers.

1. Is not accountants’ liability already covered in introductory business lawllegal environment courses? Yes, accountants’ liability is often covered in basic busines lawflegal environment courses, but necessarily a t only a superficial level. The chapter on accountants’ liability is but one of thirty or so chapters in most legal environment books and only one of fifty or so chapters in most basic business law texts. In many basic texts accountants’ liability is given no separate coverage whatsoever. Because most basic courses include management, marketing, finance, and other majors as well as accounting students, the area of accountants’ liability is seldom emphasized. It is frankly impossible in an introductory course to cover the broad range of topics taught in Legal Regulation and Liability of Account- ants and still have time left for many other important topics that are traditionally taught in such courses.

2. Would accounting programs provide room for students to take a course of this nature? Some might not. On the other hand, many accounting programs, such as that a t the University of Texas, require accounting students to take several law-related courses. Other accounting programs allow such courses to be taken as electives. Beyond a basic business law course and a CPA exam preparatory course, it is difficult to conceive of a law-related course that would be of more interest or benefit to accounting majors than the one proposed in this article.

S. Should such a course be taught by accounting faculty? The answer to this question is an emphatic “no.” This course, as proposed, is a law course, not an accounting course. Only professors schooled in law could adequately and accurately convey the intricate web of legal rules and regulations and case holdings that make up the substance of this course. Indeed, the direct inspiration for the development of this course was the repeated questions about legal rules that accounting students a t the University of Texas continually brought to the legal environment faculty because the accounting faculty, which had raised the questions, did not know the answers. Experience a t the University of Texas shows that the instructor of this course need not be schooled beyond t h e basics in audit and tax rules.31 The

31 As noted earlier, in the real world accountants’ liability is not determined by accounting professors but by jurors and judges who are laymen insofar as accounting principles are concerned.


students are educated in those areas and provide the requisite knowledge for case comprehension and classroom discussion. But the instructor must be a lawyer in order to accomplish this course’s objective of providing students with a comprehensive understanding of the law that affects the accounting profession in all its aspects.

4. Will the accounting department recognize the value of this course? There is no reason why accounting faculty would not welcome the teaching of this subject matter. Accounting academics have clearly recognized the existence of a liability crisis and its detrimental effects upon the Indeed, many accounting professors have turned their empirical research skills toward issues specifically related to the litigation crisis.3s No professor of accounting could be unaware of the relevance the issues covered in this course have for all accountants and potential accountants.

5. Will the offerins of this course create a turf war with the account- i n g department? This has not been a problem at the University of Texas and need not be a problem anywhere else if properly ap- proached. Most accounting faculty, if pressed, will honestly admit that they do not have a firm enough grasp of legal rules to teach a law course, just as most business law professors will admit that they are not qualified to teach auditing or tax courses. Accounting professors still might argue that a lawyer with no special training in accounting should not teach a course such as this. As indicated above,

jg See, e.g., Bala V . Balachandran, Introduction: Auditors’ Legal Liability in th United States, 2 J. ECON. & MGMT. STRATEGY 333 (1993hoting that “[iln recent years, liability lawsuits against the auditing profession have given rise to a crisis of immense proportions.. . .”); Thomas Lys, Discussion: The Evolution of Lawsuits Against Audi- tors-Determinants, Consequences, and Solutions, 2 J. ECON. & MANAGEMENT STRATEGY 427 (1993)khe “increase in litigation threatens the economic viability of the audit profession. . . .’I

33 The litigation crisis has made law-related issues, especially questions of legal reform, matters of top priority for those who fund accounting research. Perhaps not coincidentally. American accounting professors have begun to turn their empirical research toward this area. See, e.g.. Nicholas Dopuch & Ronald R. King, Negligence Versus Strict Liability Regimes in Auditing: An Exprperimental Investigation, 67 ACCT. REV. 97 (1992Hexamining the supply of and demand for auditing services in different liability regimes); Ronald A. Dye, Disclrssionr Limiting Auditors’ Liability, 2 3. ECON. & MGMT. STRATEGY 435 (1993)(examining effects of allowing accounting firms to incorporate to minimize liability); William R. Kinney, Jr.. Auditors‘ Liability: 0;Ppor- tunities for Research, 2 J. ECON. & MANAGEMENT STRATEGY 349 (1993Houtlining a program of research for accounting academics); Zoe-Vonna Palmrose, An Analysis of Auditor Lit igatim Disclosures, 10 AUDITING 54 (199lHanalyzing auditor litigation disclosures in 761 cases); David E. Wallin, Legal Recourse and the Demand for Auditing, 67 ACCT. REV. 121 (1992Xanalyzing impact of threat of litigation upon fraudulent financial reporting).

1995 I Designing and Delivering a Course I 53

this is not true, but if an accounting department made an issue of this, a team teaching approach could resolve any problems.

Certainly there will be some overlap with certain subjects taught in auditing courses, for example. But the audit course generally addresses the question: What do GAAP and GAAS require in this case? The law course addresses several related yet distinct questions: Does compliance with GAAP and GAAS mean that an accountant will not be liable? Whether or not there was compliance in a particular audit failure, will there be s ta te law liability for negligence or fraud‘? To whom might liability extend? Will there be federal securities law liability under Section 11, Section 12(2), Section 10(b), or others? Will the accountant be open to sanction by the SEC under Rule 2(e)? Is RICO liability a worry? These and numerous related legal questions a re also worth asking. And, having been asked, they should be answered by a lawyer.

Accounting faculty may worry that coverage of so many lawsuits, which often arise out of audit failures, carelessness by tax preparers, and other mistakes by accountants will damage the image students have of the accounting profession or perhaps frighten students into leaving their accounting majors. Again, a t the University of Texas this has not been a problem. Any student who can read a newspaper is aware of the rough outlines of the accountants’ liability crisis. I t comes as no surprise to accounting students that litigation will be a potential concern to them when they enter the profession.

As noted earlier, this course allows students to learn from the mistakes of others. It also allows students to study cases where accountants did things properly and avoided liability. The course covers the “good news” legal development^?^ a s well as the bad. It shows students how litigation can be minimized and liability avoided by, for example, intelligent use of engagement letters, alternative dispute resolution techniques, organizing as a limited liability corporation or limited partnership. Any accounting faculty should welcome the imparting of such information to accounting students.

TEXTBOOKS

There are several texts that would be suitable for this course. The text currently used in our program is HBJ Miller’s, Accountants’ Legal LiabiLity: Prevenhon and Defense, by George Spellmire, Wayne Baliga, and Debra Winiarski. The hardback edition costs about $75.

a4 See supra notes 22-24.

54 I Vol. 13 1 The Journal of Legal Studies Education

When available, the paperback edition is approximately $50. The book has many strengths. It is written in clear, concise language that does not presuppose any prior legal knowledge by its readers.

Basic legal theories are explained and then illustrated with a few, and sometimes several, cases that clarify the rules and reasoning behind the statutory and common law principles that make up the body of law applicable to an accountant’s potential liability. Many of the cases are described in the text and cited in footnotes. Many others are, without being named or cited, contained in separate boxes organized in four parts: Facts, Issues, Resolution, and Commentary. These summaries are generally very well done, and the authors’ commentary is often quite helpful.

The book covers extensively potential theories of liability that might be used against accountants, including common law theories of breach of contract, breach of fiduciary duty, fraud, and negligence. It also covers potential state and federal statutory theories of liability, including those based on state deceptive trade practices acts, federal securities laws, RICO, federal tax laws, and FIRREA. It covers audit engagements, compilation, review, and other reports, tax return preparation and tax planning, consulting, financial planning, and other types of work done by accountants.

The text also contains two chapters on risk management (focusing on firm organization and practice management as well as professional liability insurance) and two chapters on what to expect from a lawsuit (including the rights and duties of accountants vis-a-vis their insurance companies and the steps needed for preparation and trial of a lawsuit).

In addition to providing generally accurate statements of the law, analysis of legal principles, and helpful illustrations from the case law, the HBJ Miller text effectively highlights how important it is for accountants to (1) minimize their liability by carefully drawing their engagement contracts, and (2) prepare for effective defense of lawsuits by carefully documenting the work that they do.

The HBJ Miller text does have some drawbacks. Most particularly, and perhaps stemming from the fact that it has three authors, the book‘s organization is weak in that there is a certain amount of overlap and repetition of subjects. For example, Chapter 7 is entitled “Securities Exposure” and Chapter 18 is entitled “Liability of Ac- countants Under t h e Securities Law.” Both contain extensive and accurate coverage of lawsuits against accountants under federal securities laws, but there is some needless repetition. Chapters 5 and 20, both addressing tax preparation and planning liability, also plow the same ground.

1995 1 Designing and Delivering a Course I 55

Also, the case summaries, while well-written and certainly helpful, are neither named nor cited. All a r e summarized by the authors. A few selected full-text cases, or a t least edited cases containing substantial excerpts from the judges’ opinions as a re commonly found in traditional business lawfiegal environment texts, would improve this book.

Duties and Liabilities of Public Accountants (5th ed. 1995) by Denzil Y. Causey, Jr. & Sandra A. Causey could also be used as a text. This is a wonderful resource, but like the Spellmire book it is written more as a hornbook than a s a textbook. Another possible text is the Irwin book, The Accountant’s Guide to Legal Liability and Ethics (1993) by Marc J. Epstein and Albert D. Spalding,Jr. The text does not cover quite as many subjects in quite as much detail a s many professors would prefer, but it is generally well done and is thorough. It should definitely be considered.

Other books that could supplement the course include: (1) Steven M. Mintz’s Cases in Accounting Ethics and Professionalism (2d ed. 19921, an excellent paperback book containing detailed case studies in accounting ethics, and (2) Gary L. Tidwell’s Anatomy of a Fraud (19931, an entertaining case study of t he PTL fiasco, the accounting errors that contributed to it, and the ensuing l i t i g a t i ~ n . ~ ~

Other valuable resources include the annual seminar books on accountants’ liability published by the Practising Law Institute and by ALUABA. Also, Mark Shroyer’s, Accountant Liability (1991) published by Wiley and Robert J. Haft’s Liability of Attorneys and Accountants jor Securities Transuctions (1992-93) published by Clark Boardman Callaghan are helpful resources.

COURSE CONTENT

As currently taught a t the University of Texas, this course in regulation and liability of accountants is organized into seven major parts.

Part One: General Rep la t ion of Pructice

This unit is subdivided into two sections. The first deals with licensing and disciplinary procedures and the problems faced by unlicensed practitioners. Although the licensing requirements are primarily aimed a t protecting the public, they also emphasize the

35 See Robert Prentiee, Review Essaly, 31 AM. BUS. L. REV. 519 (1993) for a detailed review of this book.


importance of a valid license to the accountant. In discussing state accountancy board regulation, the section emphasizes an area of recent controversy- advertising by accountants and their right to do so under the first amendment. The unauthorized practice of law is also discussed briefly.

The second section of this unit deals with confidentiality and privilege. An accountant is generally under a fiduciary duty not to disclose confidential information pertaining to her client. The limits of this duty and the serious consequences attendant to its breach are covered. The controversy over the existence of a limited account- antlclient privilege is also discussed.

Part Two: State Law Causes of Action Part Two deals with the various contractual and tortious theories

of liabilty that can give rise to litigation against accountants under state law. Among those covered are: (1) defamation, (2) fraud, (3) breach of fiduciary duty, (4 ) breach of contract, and (5) negligence and negligent misrepresentation. The students probably received a background in these theories in their introductory business lawllegal environment courses, but their attention is intensified when every illustrative case in the text and class involves lawsuits against accountants.

Naturally the most time in this segment is spent discussing the negligence theory and negligent misrepresentation. Class discussion focuses upon such issues as the scope of an accountant’s third-party liability36 (the class is required to read BiZy v. Arthur Young & CO.~~) , the accountant’s contributory negligence joint & several

the “expectation gap,”4o and whether compliance with GAAP

38 See generally, John W. Bagby & John C. Ruhnka, The Controversy Over Third Purty Rights: Toward More Predictable Parameters of Auditor Liability, 22 GA.L.REV. 149 (1987): Thomas L. Gossman, IMC v. Butler: A Case for Expanded Professional Liability for Negligent Afisrepresentation?. 26 AX. BUS. L.J. 99 (1988); James John Jurinski, The Common Law Liubility of Auditors: Judicial Allocation of Business Risk. 23 WILLAMETTE L.REv. 367 11987); Arthur J. Marinelli, Jr., The Expanding Scope of Accountants’ Liabilities to Third Parties, 23 CASE W. RES. L. REV. 113 (1971).

834 P.2d 745 (Cal. 1992Xcontaining an excellent discussion of the policy grounds for choosing a relatively narrow scope of liability and a spirited dissent presenting the opposing arguments).

38 See generally, Robert A. Prentice, Can the Contributoq Negligence Defense Con- tribute to a Defusing of the Accountan.ts’ Liability Crisis in Common Law Countries? - WIS. INT’L L.J. - (1995Xforthcomingl

39 See generally, Jordan H. Leibman & Anne S . Kelly, Accountants’ Liability to Third Parties j o r Negligent Misrepresentation: The Search for a New Limiting Principle, 30 AM.Bus.L.J. 345 (1992).

w See generally, Marianne M. Jennings, et. al., The Auditor’s Dilemma: The Incon- gruous Judicial Notions of the Auditing Profession and Aetuul Auditor Practice, 29 Av.Bus.L.J. 99 (1991).

1995 I Designing and Delivering a Course I 5 7

and GAAS will immunize an auditor from liability. There is extensive discussion of the basic elements of negligence liability: duty, breach of standard of care, proximate causation, and damages. A s ta te statutory basis for liability - the deceptive trade practice act - is also included in this section.

Part Three: Accountant Liubility in Specialty Areas

Although the students have already studied negligence and breach of contract cases involving a wide range of accounting activities, it nonetheless makes sense to emphasize certain areas of practice and the special problems that they present. Three areas of practice are covered in this section. First, consulting (management advisory serviceslexpert systems) is covered in some detail. This area has given rise to litigation in recent years and as it continues to generate a greater and greater portion of the income earned by accounting firms, it deserves more attention.

The second section of P a r t Three addresses accountants' liability for provision of financial planning and investment advisory services. Again, these are areas that accountants have increasingly expanded into in recent years. State common law actions and federal regulation under the Investment Advisers Act of 1940 and ERISA are given special a t tent ion.

The third section of Par t Three discusses civil and criminal tax liability of accountants. There are many IRS regulations to discuss and, as noted earlier, half the civil lawsuits filed against accountants arise out of tax work. Therefore, this is a lengthy and fairly technical section. Unfortunately for prospective accountants, there are also numerous criminal t ax provisions that must be covered.

Pwrt' Four: Federal Regulation This unit contains some of the more important federal regulations

under which accountants may find themselves liable. The first section contains a study of the Racketeer Influenced and Corrupt Organiza- tions Act (RICO). RICO has been applied very broadly and produced large judgments against accounting firms. Fortunately, the Supreme Court's 1993 decision in Reves u. Ernst & Young-" has recently reduced RICO's scope as against the accounting profession.

The second section in this part covers the Foreign Corrupt Prac- tices Act of 1977. Although the anti-bribery provisions of the FCPA tend t o get most of the attention, the accounting provisions are just as important and, naturally, quite relevant to prospective accounting professionals.

" 113 S.Ct. 1163 (1993).


The third section of Part Four covers the legislation and litigation arising from the S&L debacle of the 1980s. which continues to give rise to litigation filed by individuals and, as noted earlier in this article, large settlements with the government. The key act is the Financial Institution Reform and Recovery Enforcement Act of 1980 (FIRREA) and an entire alphabet of agencies-the FDIC, FSLIC, RTC, and OTS -is involved with FIRREA enforcement. Civil litigation under state law theories is also covered. The course necessarily examines the causes of the S&L scandal and the reasons accountants have been caught up in it, including the fact that 29 of 31 insolvent S&Ls in California were given “clean” reports by their independent auditors just before they failed.42

Part Five: Federal Securities Regulation

This is an extensive unit covering comprehensively a very important type of federal regulation - federal securities laws. The accounting profession’s role in securities regulation is critical to corporate governance in the Further, liability arising from that role can be tremendous.

This section initially covers civil liability provisions of the 1933. Securities Act, including Section 11, Section 12(1), Section 12(2), and Section 17(a). Most of this litigation under these sections arises out of public offerings of securities and private placements and small offerings that (sometimes) should have been registered but were not. The accountant’s role in providing financial reporting information for registration statements is emphasized.

The majority of Part Five covers Section 10(b) and Rule 10-5 of the Securities Exchange Act of 1934. This coverage is extensive because most of the really large judgments against accounting firms have been rendered under lob-5. As noted earlier, a 1993 study by the Big Six reported that they faced $30 billion in shareholder claims, most of which had as their focus a 10b-5 cause of action.44 The same survey found that the firms paid $373.8 million on lob-5 claims in 1992 alone.45 Coverage of 10b-5 must include the good news-the

12 Jan S. Blaising, Note: Are the Accountants Accountable? Auditor Liability in the Sawings and Loan Crisis, 25 IND.L.REV. 475. 486 (19911.

43 See, e.g., Abraham J. Briloff, The Corporate Governance and Aecountahility Malaise: An Accountant’s Perspective, 9 J.CORP.L. 73 (1984); Joel Seligman, Accounting and, the New Corporate Law, 50 WASH. & LEE L.REv. 943 (1993).

44 Marianne Lavelle. Lawyers and Accountants Hail Dodd-Domenici Bill, NAT’L L.J., May 9. 1994, at B1, B2.

4 5 Karen Donovan, Quick Fallout Likely From Central Bank, NAT’L L.J., May 2. 1994, at B1.

1995 1 Designing and Delivering a Course I 59

Supreme Court’s decision in Central Bank of Denver v. First Interstate Bank of Denver4= holding that there is no aiding and abetting cause of action under Section 10(b). This decision will probably benefit accountants substantially.

Coverage of Section 10(b) also includes coverage of insider trading rules. In several roles, including as auditors of public corporations, accountants often have access to sensitive information. There have been several SEC administrative and criminal actions brought against accountants who improperly traded on that i n f ~ r m a t i o n . ~ ~ Therefore, it is well that prospective accountants be taught their responsibilities under federal insider trading legislation. Under the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA), accounting firms also have special duties to prevent their employees from en- gaging in improper trading.

Some coverage of accountants’ liability under the proxy rules, most particularly Section 14!a) of the 1934 Act, and their liability under the “filed documents” provision in Section M a ) of the 1934 Act, is also provided.

A special section covering SEC enforcement actions, primarily under Rule 2(e) of the SEC’s Rules of Practice i s also included in this unit. There has been a flurry of SEC activity initiated against accountants in recent years arising out of numerous audit These cases provide very interestng case studies. Some involve some of the more flagrant financial scandals of recent years, including Miniscribe and P h a r - M ~ r ~ ~

Part Six: Selected Employment Issues

This part has two sections. The first section addresses relevant employment laws and procedures that will be useful t o prospective accountants so that they may (1) know their own rights, and (2) avoid liability. This part covers Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and others.

The second section of this unit addresses the issue of covenants- not-to-compete. Such covenants signed by accountants have generated

‘6 114 S.Ct. 1439 (1994). E.g.. In re William P. Lorea, 1992 SEC Lexis 313 (1992); SEC v. Adams, No. 87-

03096, slip op. (D.Ca1.. May 13, 1987); SEC v. Henderson, Civil Action No. 86-2002-N (D.Mass., filed July 7, 19861.

.m E.g., Checkosky v. SEC, 23 F.3d 452 (D.C.Cir. 1994). 39 See yerzrally David R. Campbell & Larry M. Parker, SEC Communicictions to the

Independent Auditors: A n Anurlysis 01 Enii,r.cement Actions, 11 J. ACCT. & PUB. POL’Y 297 (1992).

60 I Vol. 13 / The Journal of Legal Studies Education

substantial litigation in recent years and a basic knowledge of the rules is essential to students who will soon be asked to sign such covenants .= Part Seven: Limiting Liability

This unit covers t h e defensive tactics that accountants and accounting firms can utilize in t h e everyday management of their practices in order to mitigate future liability. Prospective accountants are counseled to draft “air-tight” engagement letters which should be as precise as possible in defining the ambit, scope and limitations of the work-product and the personnel involved. Because of the potential dangers of liability and costs of litigation, accountants should also consider adding a binding arbitration clause to any letter of engagement.

Other tactics that are covered include (1) labeling work-product as “opinion” whenever justified, (2) screening clients carefully before accepting engagements, (3) avoiding certain troubled industries, (4) considering organization of the accounting firm as a limited liability company or limited liability partnership (where permitted), (5) pro- curing of insurance, (6) sheltering of assets, and (7) use of alternative dispute resolution whenever possible.

PEDAGOGICAL APPROACH

This course is currently taught primarily as a lecture course in order to facilitate coverage of the vast range of materials outlined in the previous section. A 400-page course outline generally tracks the lectures, giving the students factual summaries of numerous additional cases beyond those contained in the textbook.

Despite the predominant lecture format, the course is designed to assist in the development of the oral communication and writing skills that the accounting profession demands of its recruits.51 For example, student input and discussion is encouraged. The syllabus, reproduced

50 See generally, Serena L. Kafker, Golden Handmgs: Enforceability of Non-Compe- tition Clauses in Profissional Partnership Agreements of Accountants, Physicians, and Attorneys. 31 AM. Bus. L.J. 31 (1993).

51 Richard Lau & D. Lynn Rans, They Can Add But Can They Communicate Accounting Education?, Bus. FORUM, June 22, 1993. at 24 (AICPA “white paper” found that accounting graduates needed communication, intellectual, and interpersonal skills); Linda M. Leinicke, et. al., The 150-hour Requirement, J. ACCT., Sept. 1992. at 7 (CPAs rank communication skills very highly in recruiting); Maryann Traficante Mills, ‘Soft Skills’ Now Hard Necessities; Colleges Strive to Meet Business D e m n d fw ‘Intangibles,’ CHICAGO TRIB.. July 24, 1994, at 23 (accounting firms are looking for oral and writing skills).

1995 Designing and Delivering a Course / 61

in Appendix 1, informs the students that an important part of their grade depends upon questions they ask, their answers to questions posed by the instructor, and their participation in general class discussions. Class debate of critical issues, such a s the scope of an accountant’s third-party liability in negligence, is also required.

Additionally, students are required to brief cases in class. As noted above, the Spellmire textbook contains only heavily edited case summaries. For that reason, a list of approximately 75 additional important cases has been compiled as suitable for student briefs. Most of these cases are relatively new. Most are not covered in the textbook. The student who is assigned one of these cases will be given a photocopy of the original court opinion. That student will deliver an oral brief in class a t the appropriate time and then submit a written copy of the brief. Students are cautioned to take seriously the oral presentation of their briefs. This is an opportunity for them to work on their oral communications skills. The written briefs are kept on file in the instructor’s office; any student can come and check the briefs out in order to prepare for exams. A list of the cases used in a recent semester is contained in Appendix 2 t o this article.

As the syllabus contained in Appendix 1 indicates, the students are required to write term papers. This is done primarily to require the students to work on their research and writing skills, another area that the accounting profession wishes emphasized in accounting e d u c a t i ~ n . ~ ~ The papers are to be of 15-20 pages in length. Because the main focus of the exercise is the substance of the research and the effectiveness of the writing, students are given substantial lati- tude in selecting their topics. Four approaches a re suggested to the students. First, they can study a famous or current financial scandal involving accountants. Headlines in the Wall Street Journal in recent years have covered such scandals as Lincoln Savings, Miniscribe, Phar-Mor, PTL, and BCCI. Students a re to describe the factual background and then evaluate the liability of the accountants involved in terms of the legal theories (state and federal) that have been studied in class. Second, students can address a controversial issue of the day involving accountants’ liability, such as the scope of third- party negligence liability, the role of a contributory negligence defense, the propriety of joint and several liability, and the wisdom of current pending reform legislation. Third, students can research the state of accountants’ liability abroad. Fourth and finally, the students can choose to read, summarize, und critique a law review article

52 Lau & Rans, id. (surveyed accountants wished they had emphasized research techniques when they were in school).


dealing with accountants’ liability. The students are provided with a list of approximately 40 such recent articles, but can also find their own article that is not on the list. The list of the law review articles provided to students in a recent semester is contained in Appendix 3 to this article.

Problem-solving rather than memorization is encouraged by (1) making all exams open-book, open-note, and (2) basing virtually all exam questions on real cases. This is consistent with the recent realization by the accounting profession that it is better for students to learn to solve problems themselves than to simply memorize answers they are given by their professors.% Students are tested on their ability t o understand the legal principles discussed in class well enough to be able to apply them to real cases that are similar to, but not identical to, the ones studied in class and reach the appropriate outcome or a t least a strongly defensible position.

Professor Don Tidrick of t h e University of Texas has noted that the rccounting education establishment now agrees that problem- solving of the type studied in law is preferable to honing one’s memorization skills:

Lawyers are not trained to memorize all the rules, they’re trained to search for answers to questions. Increasingly, we think that’s t h e relevant skill for accountants-to search for answers to business and accounting questions rather than carrying all of it around in rnem01-y.~~

CON c LU SION

Any professor approaching this course would probably want to make substantial changes to the approach described here. Many would choose a discussion rather than a lecture format. Many would choose a different text. Many would choose not to cover as many topics, and to cover fewer in greater detail. These modifications are all easily made. Offered in any number of formats, a course about the legal liability and regulation of accountants can provide a valuable learning experience for accounting students.

’3 Julia Matusky, Alarm Sotmkd on Educatzon of Accountany Students, FIN. POST, Dee. 3, 1993, at 22 (‘I.. .university accounting departments are their own worst enemy as they design courses and exams that reward students who are good a t . . . memorizing tons of information and solving structured problems.”).

id Avrel Seale, Accountabzlity, TEXAS ALCALDE, Jan./Feb. 1995, at 10.


APPENDIX 1: SYLLABC'S

NATURE AND PURPOSE OF COURSE:

This course is intended to give prospective accounting professionals an overview of the important regulations governing their chosen profession and of the many areas of potential legal liability that they will face. State and federal regulation will be studied. A broad range of activities - audit, tax preparation and planning, management advisory services, financial planning, etc. - will be covered. Literally hundreds of cases will be studied so tha t students may learn from the mistakes of those who have preceded them.

TEXT: (1) George Spellmire, Wayne Baliga & Debra Winiar- ski, ACCOUNTANTS' LEGAL LIABILITY 1994

(2) Course Outline (by Prof. Prentice) There a re several components of the grading

system in this course. Class Participation: Your class participation will be graded in terms of (a) cases that you brief in class (these will be assigned in advance; writ ten copies of your briefs a re to be submitted to me after you have orally presented them in class); (b) your answers to questions asked by me in class; (c) questions you ask of me in class; and (d) your participation in general class discussions.

Regarding the briefs, remember that they are aptly named. A brief is to a case what a book report is to a book. Your brief should contain: (i) the name of the case, (ii) the essential facts, (iii) the disposition (if any) of the lower court proceedings, (ivf the issuek) presented to the court, (v) the resolution of that issue, and, most importantly, (vi) the court's rationale for deciding the case as it did. If you have any questions, I have several examples of good briefs on file in my office. I will keep a file of everyone's written briefs that will be available for copying by students when exam time rolls around. Term Papers: In order to (a) sharpen your research skills, (b) improve your writing skills, and (c) introduce you to a particular area in more detail than class time permits, terms papers will be required. I expect the papers to be 15-20 pp in length. You may do any one of four things with your paper. First, you may inves- tigate thoroughly the arguable errors of accountants in recent or ongoing scandals, such as BCCI, Phar-Mor, PTL, ZZZZ Best, Crazy Eddie. You should explain what happened and discuss the legal liability of the accountants involved in light of the legal issues we have

GRADING:


discussed in class. Second, you may discuss both sides of a hot legal issue of concern to accountants, such its the scope of third-party liability, the availability of the contributory negligence defense, the fairness of joint & several liability, the “expectation gap,” or reform legislation pending before Congress. Third, you may read, summarize, and critique any one of a long list of law review articles dealing with accounting liability issues that I will provide. Fourth, you may write a paper on legal liability of accountants in other countries. For example, you could write about the “expectation gap” in England, the third-party liability of accountants in Canada, or the role of accountants under the securities laws of France. Please come talk to me about these topic ideas at any time. We operate on a firstcome, first-serve basis. No duplications, please. Examinatim: There will be two examinations. They will be open-book, open-note. The exams will contain essay questions, short-answer questions, and some objective questions. Virtually all questions will be based on real cases. You will be asked to apply the principles we have studied in class to resolve the factual situations presented in these new cases.

Distribution of Points: Exam # 1 35Oh Exam # 2 35% Term Paper 20% Class Participation 1 0 010 Total 100%

ATTENDANCE: I’m mean. I require attendance, I even have a seating chart. You may miss class 3 times for any reason. Any additional missed classes will require an explanation evidencing some level of exigency. Ab- sent a good excuse, a fourth miss will force me to give you an “F” and, worse still, involuntarily trans- fer you to A&M. I wouldn’t chance it if I were you.

ASSIGNMENTS: Assignments will be made in class. There will be quite a bit of reading in this course, but I optimistically expect that all assignments will be read by all students. I have ways of determining whether this is actually the case during the class participation portion of our festivities. Remember the 10% class participation portion of your grade.


PROJECTED SCHEDULE AND ASSIGNED READINGS: Subject, of course, to modification, a tenative course schedule with attached reading assignments looks like this:

Session Topic($ 1 Rationale for Course. Discussion of Accountants’

Liability Crisis in U.S. and Abroad.

PART ONE: GENERAL REGULATION OF PRACTICE

2 State a n d F e d e r a l Regulat ion of Accounting Practice. Read: 22.01 - 22.11.

Read: 1.24 - 1.28 and 12.12 - 12.13 3 Confidentiality and Privileges

PART TWO: STATE LAW CAUSES O F ACTION

4

5

6

7

8

9

10

Defamation and Fraud Read: 10.09 - 10.14 Breach of Fiduciary Duty and Breach of Contract Read: 10.06 - 10.09 and 10.04 - 10.06 Negligence and Negligent Misrepresentation: Duty Read: 11.01 - 11.22 and Bily v. Arthur Young Negligence: Standard of Care Read: 12.01 - 12.14 (Skim: 3.01 - 3.71 and 4.01- 4.64) Negligence: Causation and Damages Read: 13.01 - 13.10 and 14.01 - 14.12. Negligence: Defenses Read: 15.01- 15.20, and National Surety Corp. v. Lybrand and Halla Nursery v. Baumann-Furrie & co. Deceptive Trade Practice Acts Read: 16.02 - 16.03

PART THREE: ACCOUNTANT LIABILITY IN SPECIALTY AREAS

11 Management Advisory Services (Consulting) Liabil- ity Read: 6.44 - 6.56 and 23.01 - 23.26 Financial Planning and Investment Advisory Serv- ices Liability Read: 6.01 - 6.36

12


13 Tax Practice Liability Read: 20.01 - 20.17

14 Tax Practice Liability Read: 5.01 - 5.63

15 MID-TERM EXAM

PART FOUR: SOME IMPORTANT FEDERAL REGULATIONS 16 RICO

17 Foreign Corrupt Practices Act 18

Read: 17.01 - 17.10

FIRREA: Accountants and the S&L Mess Read: 3.10 - 3.19 and 21.01 - 21.09

PART FIVE: FEDERAL SECURITIES REGULATION

19

20

21

22

23

24 25

26

Section 11 Liability Read: 18.02 - 18.13 Section 12 and Section 17(a) Liability Read: 18.13 - 18.25 and 18.71 - 18.75 Section 10(b) and Rule 10b-5 Liability Read: 18.32 - 18.57 Section 10(b) continued Read: 18.57 - 18.71 Section 10(b) continued Read: 7.01- 7.30 Insider Trading Section 14(a) Proxy Regulation and Section 18(a) Filed Documents Liability Read: 18.25 - 18.32 SEC Enforcement Actions: Rule Z(e) Reud: 19-01 - 19.15

PART SIX: SELECTED EMPLOYMENT ISSUES 27 28 Covenants-Not-to-Compete

Civil Rights Laws 8z Accountants

PART SEVEN: LIMITING LIABILITY Drafting the Engagement Letter, Record-Keeping, Alternate Dispute Resolution Read: 1.18 - 1.23

ance, Sheltering Assets Read: 2.01 - 2.33, 8.01 - 8.20 FINAL EXAMINATION

29

30 Forms of Business Organization, Liability Insur-

1995 1 Designing and Delivering a Course I67

APPEhiIX 2: LIST OF CASES TO RE BRIEFED

Part One 1. Edenfield v. Fane, 113 S.Ct. 1792 (1993)(advertising regulation). 2. Sears , Roebuck & Co. v. Parsons , 401 S.E.2d 4 (Ga.

3. Joffe v. Wilson, 407 N.E.2d 343 (Mass. 1980)(unauthorized prac-

4. Couch v. US . , 409 U.S. 322 (1973)(accountant’s privilege). 5. US . v. Arthur Young & Co., 465 U.S. 805 (1984)(accountant’s

199l)(contingency fees).

tice of law).

privilege).

Part Two

absolute privilege).

1976Ndefamation - qualified privilege).

6. Angel v. Ward, 258 S.E.2d 788 (N.C.App. 1979)(defamation -

7. Ross v. Gallant, Fa r row & Co., 551 P.2d 79 (Ariz.App.

8. Hall v. Edge, 782 P.2d 122 (Okl. 1989Nfraud- opinion defense). 9. In re F.W. Koenecke and Sons, Inc., 60 F.2d 924 (7th Cir.

1979)(fraud - firm’s vicarious liability). 10. Rauch v. Karpman, -N.Y. -, N.Y.L.J., Apr. 13, 1994, a t

21 (breach of fiduciary duty). 11. Hydroculture, Inc. v. Coopers & Lybrand, 848 P.2d 856 (Ariz.App.

1992Nnegligence - duty to client). 12. Ul t ramares Corp. v. Touche, 174 N.E. 441 (N.Y.

1931 )(negligence - t hird-part y liability). 13. Credit Alliance v. Arthur Andersen & Co., 493 N.Y.S.2d 435

(Ct.App. 1985)(negligence - third-party liability) 14 . H. Rosenblum, Inc. v. Adler , 461 A.2d 138 (N.J.

1983)(negligence - third-party liability). 13. First National Bank of Commerce v. Monco Agency, 911 F.2d

1053 (5th Cir. 1990)(negligence - third-party liability). 16. Chevron Chemical v. Deloitte & Touche, 483 N.W.2d 314

(Wis.App. 1992Nnegligence - duty to blow whistle & duty to correct). 17. U S . v. Simon, 425 F.2d 796 (2d Cir. 1969)(negligence-~ompli-

ance with GAAP & GAAS as discharge of duty of care). 18. 1136 Tenants’ Corp. v. Max Rothenberg & Co., 319 N.Y.S.2d

1007 (A.D. 1971Hnegligence - duty in unaudit situation). 19. Robert Wooler Co. v. Fidelity Bank, 479 A.2d 1027 (PaSuper .

1984)(negligence -duty in unaudit situation). 20. William Iselin & Go., Inc. v. Landau, 513 N.Y.S.2d 3 (A.D.

1987hegligence - duty in unaudit situation).


21. Drabkin v. Alexander Grant & Co., 905 F.2d 453 (D.C.Cir.

22. In re Gouiran Holdings, Inc., 158 B.R. 3 (Bkrtcy.E.D.N.Y.

23. Vogt v. Abish, 663 F.Supp. 321 (S.D.N.Y. 1987)(negligence-

24. Woodbine Electric Service, Inc. McReynolds, 837 S.W.2d 258

25. Brown v. KPMG Peat Marwick, 856 S.W2d 742 (Tex.App.

26. Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.

27. Schacht v. Brown, 711 F.2d 1343 (7th 1983)(negligence - vicari-

28. Russell v. Campbell, 725 S.W.2d 739 (Tex.App. 1987Wdeceptive

29. Parker v. Carnahan. 772 S.WBd 151 (Tex.App. 1989)(deceptive

30. Lyne v. Arthur Andersen & Co., 772 F.Supp. 1064 (N.D.111.

1990)hegligence - proximate causation).

1993)hegligence - proximate causation).

mitigation of damages).

(Tex-App. 1992)hegligence -statute of limitations).

1993)(negligence - statute of limitations).

1982)(negligence - vicarious liability).

ous liability).

trade practices act).

trade practices act).

199lNdeceptive trade practices act).

Part Three

1989)(consulting liability).

S.W.2d 509 (Tenn.App, 1987)(consulting liability).

199O)(financial planning liability).

1963)kivil tax liability).

tax liability).

31. Diversified Graphics Ltd. v. Groves, 868 F.2d 293 (8th Cir.

32. Union Planters Corp. v. Peat, Marwick, Mitchell & Co., 733

33. Anoka Orthopaedic Assoc. v. L e c h e r , 910 F.2d 514 (8th Cir.

34. Lindner v. Barlow, Davis & Wood, 27 CaLRptr. 101 (Cal.App.

35. Midwest Supply, Inc. v. Waters, 510 P.2d 876 (Nev. 1973)(civil

36. Rassieur v. Charles, 188 S.W.2d 817 (Mo. 1945)(civil tax liability). 37. Goulding v. U.S., 957 F.2d 1420 (7th Cir. 1992)kriminal tax

38. US. v. Schulman, 817 F.2d 1355 (9th Cir. 1987)(criminal tax

39. US. v. Flaxman, 495 F.2d 344 (7th Cir. 1974)(criminal tax

liability).

liability).

liability).

Purt Four 40. Burdett v. Miller, 957 F.2d 1375 (7th Cir. 1992)(RICO). 41. Reves v. Ernst & Young, 113 S.Ct. 1163 (1993)(RICO).

1995 I Designing and Delkuering a Course I69

42. Univ. of Maryland v. Peat , Marwick, Main, 996 F.2d 1534 (3d

43. Garvin v. Greenback, 856 F.2d 1392 (9th Cir. 1988)(state RICO

44. SEC v. World-Wide Coin Investments, Ltd., 567 F.Supp. 724

45. O'Melveny & Myers v. FDIC, 114 S.Ct. 2048 (1994NFIRREA). 46. FDIC v. High Tech Medical Systems, 574 So.2d 1121 (Fla.App.

Cir. 1993KRICO).

laws).

(N.D.Ga. 1983NFCPA).

1991)(S&L liability under state law).

Part Five 47. In the Matter of Doman Helicopters, Inc., 41 S.E.C. 431 i1963)(Sec.

11 -materiality) 48. Wielgos v. Commonwealth Edison, 892 F.2d 509 (7th Cir.

1989Mec 11.- materiality). 49. Abbey v. Computer Memories, Inc., 634 FSupp . 870 (N.D.Ca1.

1986)(Sec. 11 -tracing requirement). 50. Lyne v. Arthur Andersen & Co., 772 FSupp . 1064 (N.D.111.

1991NSec. 11 -causation). 51. In r e Worlds of Wonder Securities Litigation, 814 FSupp. 850

(N.D.Ca1. 1993)(Sec. 11 -damages). 52. Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir.

1969)iSec. 11 -indemnity). 53. Globus v. Law Research Service, Inc., 318 F.Supp. 955 (S.D.N.Y.

1970)(Sec. 11 - contribution). 54. Escott v. BarChris Construction Co., 283 F.Supp. 643 (S.D.N.Y.

1968Mec. 11 -due diligence defense). 55. In re Victor Technologies Securities Litigation, FED.SEC.L.REP.

(CCH) Para. 93,158 (N.D.Ca1. 1987)(Sec. 11 - due diligence defense). 56. Pinter v. Dahl, 486 U.S. 622 (1988NSec. 11 - "seller" definition). 57. In the Matter of William P. Lorea. CPA, 1992 SEC LEXIS 313

58. In the Matter of Larry G. Baker, CPA, 1992 SEC LEXIS 2317

59. DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990)(10b-5-

60. In re Cascade International Securities Litigation, 840 F.Supp.

61. Basic Inc. v. Levinson, 485 U.S. 224 (1988)(10b-5-materiaiity

62. Dalton v. Alston & Bird, 741 F.Supp. 1322 (S.D.111. 1990)(10b-

63. Bastian v. Petren, 892 F.2d 680 (7th Cir. 1990)(10b-5-causation).

(1992WSec. 17(a)).

(1992NSec. 17(a)).

duty to disclose).

1558 (S.D.Fla. 1993)hOb-5 - duty to disclose).

and fraud-on-the-market theory).

5 - fraud-created-the-market theory).

70 i Vol. 13 I The Journal of Legal Studies Education

64. Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335 (9th Cir. 1980)(10b-

65. Oleck v. Fischer, 623 F.2d 791 (2d Cir. 1980)(10b-5-scienter). 66. Brown v. Ivie, 661 F.2d 62 (5th Cir. 1981)(10b-5- “in connection

with” requirement). 67. Central Bank of Denver, N.A. v. First Interstate Bank of

Denver, N.A., 114 S.Ct. 1439 (1994)(10b-5 -aiding & abetting). 68. Dept. of Economic Development v. Arthur Andersen (USA),

683 F.Supp. 1463 (S.D.N.Y. 1988KlOb-5 - extraterritorial jurisdiction). 69. SEC v. Cherif, 933 F.2d 403 (7th Cir. 199lMinsider trading). 70. Dirks v. SEC, 463 U.S. 646 (1983)(insider trading). 71. Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir.

1973)(proxy liability). 72. Adams v. Standard Knitting Mills, Inc., 623 F.2d 422 (6th C k .

1980)(proxy liability). 73. Checkosky v. SEC, 23 F.3d 452 (D.C.Cir. 1994HRule 2(e) pro-

ceedings). 74. In the Matter of Rodney Sparks, CPA, FED.SEC.L.REP. (CCH)

Para. 73,784 (1991XRule 2(e) proceedings). 75. In the Matter of Michael R. Ford, CPA (FED.SEC.L.REP. (CCH)

Para. 73,771 (199NRule 2(e) proceedings). 76. In the Matter of William G. Gaede, CPA, and Jon C. Richards,

CPA, FED.SEC.L.REP. (CCH) Para 73,743 (1990HRule 2(e) proceedings).

5- scienter).

Part Six

(Tex.App. 1979)(covenant-not-to-compete).

1989)(covenant-not-to-compete).

77. Peat, Marwick, Mitchell & Co. v. Sharp, 585 S.W.2d 905

78. Peat Marwick Main v. Haass, 775 S.W.2d 698 (Tex.App.


APPENDIX 3: LIST OF RECENT LAW REVIEW ARTICLES RELATED TO ACCOUNTANTS’ LIABILITY

(topics for s tudent papers).

1. Brian J. King, Note, Ambulance-Chasing Accountants?: In- Person Solicitation and the Professions, 34 BOSTON COLLEGE LAW REVIEW 561 (1993).

2. Denise P. Lindberg, Note, The Accountant-Client Privilege: Does it and Should it Survive the Death of the Client?, 1987 BRIGHAM YOUNG UNIVERSITY LAW REVIEW 1271.

3. Lance Levine, Note, Compliance with GAAP and GAAS: Its Proper Use as an Accountant’s Defense in a Rule lob-5 Suit, 1993 CO- LUMBIA BUSINESS LAW REVIEW 109.

4. Willis W. Hagen 11, Certified Public Accountants’ Liability for Malpractice: Effect o j Compliance with GAAP and GAAS, 13 JOURNAL OF CONTEMPORARY LAW 65 (1987).

5. Jordan H. Leibman & Anne S. Kelly, Accountants’ Liability to Third Parties for Negligent Misrepresentation: The Search for a New Limiting Principle, 30 AMERICAN BUSINESS LAW JOUR- NAL 345 (1992).

6. Victor P. Goldberg, Accountable Accountants: Is Third- Party Liability Necessary?, 17 JOURNAL OF LEGAL STUDIES 301- 302.

7. John W. Bagby & John C. Ruhnka, The Controversy Over Third Party Rights: Toward More Predictable Parameters of Auditor Liability, 22 GEORGIA LAW REVIEW 149 (1987).

8. John W. Hill, Michael B. Metzger, & Jeffrey W. Schatzberg, Auditing’s Emerging Legal Peril Under the National Surety Doc- trine: A Programfor Research, 7 ACCOUNTING HORIZONS 12 (1993).

9. Travis Morgan Dodd, Accounting Malpractice and Contributory Negligence: Justifying Disparate Treatment Based Upon the Aud- itor’s Unique Role, 80 GEORGETOWN L A W JOURNAL 909 (1992).

10. Linda B. Specht, R. Clayton Trot ter , Ronald M. Young Q Steve G. Sutton, The Public Accounting Litigation Wars: Will Expert Systems Lead the Next Assault?, 31 JURIMETRICS JOURNAL 247 (1991).

11. Lorie Soares, Note, The Big Eight, Management Consulting an,d Independence: Myth or Reality?, 61 SOUTHERN CALIFORNIA LAW REVIEW 1511 (1988).

12. James K. Vines, Note, CPAs Who Perform Management Consulting Services May Face Increased Exposure to Controlling Person Li- ability Under the Federal Securities Acts, 44 WASHINGTON AND LEE LAW REVIEW 1079 (1987).


13. Robert B. Hale, Note, Auditor Liability U& the DTPA: Can It Get Any Worse for Accountants?, 44 BAYLOR LAW REVIEW 313 (1992).

14. Paul J. Routh, Liabilities of Tax Preparers: An Overview, 13 CAPITAL UNIVERSITY LAW REVIEW 479 (1984).

15. Michael I. Saltzman, The Preparer Penalty’s Realistic Possibility of Success Standard: Its Meaning and Application, 43 FLORIDA LAW REVIEW 915 (1991).

16. Sheldon I. Banoff & Harvey L. Coustan, Final Regulations on Return Preparers’ Penalties: IRS Refuses to Deal, Preparers’ Fears Prove to Be Reallpenalty Roulette-Roll the Wheellwho Knows How the Courts Will Feel?, TAXES (March 1992), p. 137.

17. John A. Gray, Personal Liability Exposure of Financial Planners: Private Enforcement, 36 SAINT LOUIS UNIVERSITY LA w JOURNAL 623 (1992).

18. Jeff Dash, The S&L Crisis: Should Accountants Be Accountable?, 17 SOUTHERN ILLINOIS UNIVERSITY LAW JOURNAL 365 (1993).

19. Raymund G. Kawasaki, Liability of Attorneys, Accountants, A p - praisers, and Other Independent Contractors Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 42 HASTING LAW JOURNAL 249 (1990).

20. Jan S. Blaising, Note, Are the Accountants Accountable? Auditor Liability in the Savings and Loan Crisis, 25 INDIANA LAW REVIEW 475 (1991).

21. Walter F. McDonough, Does the Punishment Fit the Crime? How Federal and State Civil RICO Statutues T r a n s f m Accountant Liability, 26 SUFFOLK UNIVERSITY LAW REVIEW 1107 (1992).

22. Robert A. Prentice & Jill M. Thompson, The Legal Rl ik Against Accountants: An Analysis of Section 12, 76 KENTUCKY LAW JOUR-

23. Marianne M. Jennings, Philip M.J. Reckers & Daniel C. Kneer, The Adequacy of Auditor Disclosures in Financial Statements: Does More Disclosure Mean Less Liability? Does Acknowledgement of Non-Disclosure Alleviate Liability?, 8 JOURNAL OF LAW AND COMMERCE 283 (1988).

24. Marianne M. Jennings, Phillip M.J. Reckers & Daniel C. Kneer, The Auditor’s Dilemma: The Incongruous Judicial Notions of the Auditing Profession and Actual Auditor Practice, 29 AMERICAN BUSINESS LAW JOURNAL 99 (1991).

25. Abraham J. Briloff, The Corporate Governance and Accountability Malaise: A n Accountant’s Perspective, 9 JOURNAL OF CORPORATION LAW 473 (1984).

26. Joseph 1. Goldstein & Catherine Dixon, New Teeth for the Public’s Watchdog: The Expanded Role of the Independent Accountant in

NAL (1988).

’

1995 I Designing and Delivering a Course I73

Detecting, Preventing, and Reporting Financial Fraud, 44 THE BUSINESS LAWYER 439 (1989).

27. James L. Costello, Note, The Auditor’s Responsibilities for Fraud Detection and Disclosure: Do the Auditing Standards Provide a Safe Harbor?, 43 MAINE LAW REVIEW (1991).

28. Michael S. Raab, Detecting and Preventing Financial Statement Fraud: The Roles of the Reporting Company and the Independent Auditor, 5 YALE LAW & POLICY REVIEW 514 (1987).

29. G.J. Lander, M.T. Cronin & A. Reinstein, Reduced Liability for the Management Accountant, 68 UNIVERSITY O F DETROIT LAW REVIEW 1 (1990).

30. Lawrence R. Bard, Note, A Distinct-Responsbility Approach to Accountants’ Primary Liability Under Rule lob-5, 61 GEORGE WASHINGTON LAW REVIEW 193 (1992).

31. David R. Campbell & Larry M. Parker, SEC Communications to the Independent Auditors: An Analysis of Enforcement Actions, 11

32. Karl G. Dial, Note, Failure to Maintain Independence: A Proposed Cause of Action Against Accountunts, 62 TEXAS LAW REVIEW 923 (1984).

33. Bruce Edward Committee, Independence of Accountants and Leg- islative Intent, 41 ADMINISTRATIVE LAW REVIEW 33 (1989).

34. Roger W. Bartlett, Auditor Indqendence: Some Neglected Issues, 10 BUSINESS & PROFESSIONAL ETHICS JOURNAL 43 (Winter 1991).

35. John C. Burton, The Evolutionary Revolution in Public Accounting, 52 BROOKLYN LAW REVIEW 1041 (1987).

36. Serena L. Kafker, Golden Handcuffs: Enforceability of Non-Com- petition Clauses in Professional Partnership Agreements of Ac- countants, Physicians, and Attorneys, 32 AMERICAN BUSINESS LAW JOURNAL 31 (1993).

37. Adam F. Ingber, lob-; o r Not lob-52 Are the Current E’orts to Re form Securities Litigation Misguided ?, 6 1 FORDHAM LA w RE-

38. Stuart L. Bass, Supreme Court Limits RICO Liability for Account- ants and Outside Professionals, 98 COMMERCIAL LAW REVIEW 452 (1993).

39. Joel Seligman, Accounting and the New Corporate Law, 50 WASH-

40. Julie Faussie, Limiting Liability in Public Accounting Suits: A Desparate Appeal f rom a Beleaguered Profession, 28 VALPARAISO LAW REVIEW 1041 (1994).

41. George Cave, Extensions of Accountants’ Liability for Negligence: One Step Closer to a New Implied Warranty of Results, 56 UNIV.

JOURNAL OF ACCOUNTANCY A N D PUBLIC POLICY (1992).

VIEW S351 (1993).

INGTON AND LEE LAW REVIEW 943 (1993).

OF COLORADO LAW REVIEW 265 (1985).


42. Debra D. Burke & Max Bishop, A Survey of the Potential Liability of Accountants Under State Deceptive Trade Practices Acts, 23 MEMPHIS STATE U.L.REV. 805 (1993).