An accountant collects and assesses financial data for their client. They are business professionals who gather and interpret various financial records for either individual clients, or larger organizations and businesses. In terms of accountant responsibilities, some of the most common examples include but may not be limited to:
- Determining how accurate various financial documents are;
- Ensuring those documents are in compliance with relevant laws at both the federal and state levels;
- Preparing and maintaining financial reports and tax returns;
- Ensuring that taxes are filed and paid correctly, and on time;
- Evaluating financial operations in order to recommend best practices and identify issues;
- Strategize solutions in order to assist in the smooth running of an organization;
- Providing advice regarding cost reduction, revenue increase, and maximizing an organization’s profits; and
- Conducting forecasting, such as risk analysis assessments.
Similar to an attorney and other types of professionals, an accountant may be sued for accounting malpractice. The accountant may be sued if they fail to provide services at a level expected of a reasonably competent accountant. Additionally, an accountant may be held liable if they disregard their normal duty of care as an accounting professional.
Accounting malpractice cases may present significant legal issues and disputes for professionals, businesses, and other such entities. This is largely due to the fact that accountants are generally responsible for tracking important monetary and financial data for an individual or a company. If an accountant were to practice accounting malpractice, it may cause their client large losses in income, savings, and other such assets.
The two most common types of accountant malpractice include GAAP and GAAS violations and securities violations. Accountants are required to follow specific accounting rules and regulations outlined by the Generally Accepted Accounting Principles (“GAAP”) and Generally Accepted Auditing Standards (“GAAS”). If an accountant violates these rules, they could be found liable for malpractice. Generally speaking, if an individual is making a legal claim for accountant malpractice, they must prove that the accountant violated GAAP and/or GAAS rules.
Accountants handling the sales of securities, such as stocks, must adhere to all state and federal regulations. This includes both The Racketeer Influenced and Corrupt Organizations Act (RICO) and The Securities Acts of 1933 and 1934. Should they fail to obey these securities laws, they may also be found liable for malpractice. An example of this would be if an accountant creates a false financial statement for a business, in order to make an impact on the stock market.
Accountant malpractice can include several specific types of conduct, including but not limited to:
- Using their client’s financial accounts for their own personal use and/or gain;
- Commingling the funds from different accounts;
- Using fraud or misrepresentation when balancing workbooks;
- Failing to disclose important information from a client, or from a government report; and
- Various types of tax violations, such as tax fraud.
When Can Third Parties Sue Accountants For Ordinary Negligence?
In an accounting negligence lawsuit, A third party may be able to sue an accountant for ordinary negligence. They may be placed into one of the following three categories:
- Parties in privity;
- Knowledge of reliance; and
- All reasonably foreseeable victims.
An account will only be held liable to a third party who has a legally recognized interest in connection, or privity, with the accountant. An example of this would be if a client hired the accountant to perform work for the benefit of a third party.
An accountant will be held liable to a third party, even in the absence of privity, if the accountant:
- Knew that their work would be relied on by the third parties, or a class of third parties; or
- Knew that the client for whom the work was performed would provide the work to a third party, or a class of third parties, who would rely on the work; and
- The third party justifiably relied on the work of the accountant, as well as utilized the work for a specific use that the accountants or the clients intended to influence.
Additionally, accountants are liable to all reasonably foreseeable third parties who may reasonably rely on their work. This is true whether or not the accountant has privy with the third party, or knowledge of their reliance on their provided work.
Depending on which of the three previous categories the court in a jurisdiction recognizes, a third party may or may not be allowed to sue an accountant for economic damages resulting from their reliance on negligent work.
What Are the Steps to Sue an Accountant for Negligence?
Before suing an accountant for accounting negligence, it is important to keep in mind the difficulties and issues associated with this specific type of negligence. Accountants are subject to numerous restrictions and regulations that other professionals are not. An example of this would be how an accountant that is committing fraud may put revenue in foreign banks, which makes the money difficult to find.
Alternatively, an accountant malpractice lawsuit is similar to other types of malpractice claims. An example of this would be how accountant malpractice frequently involves a breach of duty, as well as damages or losses on the part of the plaintiff.
- The accountant owed a duty of care to their client, which may involve duties outlined in the GAAP, GAAS, or other similar standards;
- The accountant breached that duty of care;
- The breach of that duty was the direct cause of the client’s harm or loss; and
- The plaintiff’s losses can be measured and verified by a court of law.
The remedy for the violation would include a monetary damages award, which intends to compensate the plaintiff for their losses caused by the negligence or malpractice of the defendant. If multiple plaintiffs experienced losses from the same party or the same cause, a class action lawsuit may be filed instead of multiple individual lawsuits.
Can an Accounting Firm Be Liable For Ordinary Negligence Committed By Nonprofessional Members (e.g. non-CPAs) of the Firm?
An accounting firm may be held liable for ordinary negligence that was committed by a non-professional member of the firm. Generally speaking, a firm will not be able to escape liability simply because the negligence was not committed by an accountant but, instead, a non-CPA subordinate. An accounting firm can be held vicariously liable under specific circumstances.
Do I Need an Attorney To Help Me With My Accountant Malpractice Problems?
If you have any sort of accountant malpractice issues, you will need to consult with an area liability attorney. An experienced and local lawyer will be best suited to helping you understand your state’s specific laws regarding accounting and negligence, as well as what your legal options are under those same laws.
Additionally, an experienced attorney can also represent you in court, as needed, and will most likely be aware of any existing class action lawsuits you may join.