CHAPTER 20 LEGAL LIABILITY. Chapter 20. KEY LEGAL TERMS. Privity: Absent a contractual relationship, the auditor does not owe a duty of care to an injured party Breach of Contract: Client or auditor fails to meet the terms and obligations established in the contract (engagement letter)
The auditor’s liability under common law to third parties is an area that is very complex and court rulings are not always consistent across federal and state judicial jurisdictions.
If an accountant has acted with an intent to deceive a third party, the accountant can be held liable for fraud.
Section 11 of the Securities Act of 1933 imposes a liability on issuers and others including auditors for losses suffered by third parties when false or misleading information is included in a registration statement.
Rule 10b-5 states that it is
... unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Rule 2(e) of the Rules of Practice empowers the SEC to suspend any person the privilege of practicing if that person:
1. Has been convicted of a misdemeanor involving moral turpitude
2. Has been convicted of a felony
3. Has had his license to practice as an accountant suspended or revoked
4. Has been permanently enjoined from violating provisions of the federal securities laws
5. Has been found by the Commission in an administrative proceeding to have violated provisions of the federal securities laws.