Question

What is an accountant's duty of care? What is GAAP and GAAS?

Find a case that deals with an acountant that has been found to have breached the duty of care. Provide a brief summary of the facts of the case, and provide the court's analysis. Be sure to use a reference.

Answer 1

1) Accountants Duty of Care : An accountant must possess the skills that an ordinarily prudent accountant would have and exercise the degree of care that an ordinarily prudent accountant would exercise.The skills and care of an ordinarily prudent accountant are reflected in the generally accepted accounting principles ("GAAP") promulgated by the Financial Accounting Standards Board ("FASB"), and the generally accepted auditing standards ("GAAS"), promulgated by the American Institute of Certified Public Accountants ("AICPA").

An accountant conforming to GAAP or GAAS and acting in good faith, will normally not be held liable for incorrect judgments or for relying on incorrect information.On the other hand, a violation of GAAP or GAAS will be Prima Facie evidence of the accountant's negligence. An accountant can be sued for Negligence and Malpractices.

2) Meaning of GAAP And GAAS ?

A business's accountant uses GAAP "Generally accepted accounting principles" which contains standards to prepare financial statements and carry out other accounting-related tasks. On the other hand, GAAS "Generally accepted auditing standards " contains auditing standards is used by the auditor in auditing the financial statements. After the auditor reviews the financial statements, the auditor may ask for clarifications from the accountant.

3) Case study : Swynson v Lowick Rose (High Court, 2014)

Overview  

A director behind a company which sought due diligence services in relation to an acquisition alleged that the accountants owed him personally a duty of care, in addition to the duty owed to the company. The Court found that it was essential to establish whether the accountant had assumed responsibility for the advice given to the director. This was an objective test.This decision is helpful in upholding the concept of the “corporate veil” and reducing the scope for third parties, such as the company’s directors, to bring claims against accountants. The accountants’ client was the company, and the Court was unwilling to find that any personal duty of care was owed to any other party. The Court held that the advisor’s knowledge that the director might have relied on his advice was not an adequate basis for demonstrating an assumption of duty