Claims against accountants or tax preparers are governed by the common law (court cases) present in the appropriate jurisdiction. Generally, accountants owe their clients a common-law duty to exercise reasonable care. When an accountant violates this duty, the tortious act can be categorized as either negligence-based or intentional.
Negligence-Based Actions
While the common law of each jurisdiction may provide different causes of action, basic Negligence claims are potentially available to clients who have been harmed by their accountant’s failure to exercise reasonable care. Negligence claims also include Negligent Misrepresentation where the accountant’s actions caused harm to a non-client. The use of this common law doctrine is most common when the accountant does not have a direct contractual relationship with the injured party.
Example:
Bob, a CPA, is engaged by Company X to prepare financial statements specifically for use in obtaining a loan. Bob is aware that Bank Y is going to be relying on these financial statements in making the decision whether or not to lend money to X. In the course of preparing the financial statements, Bob fails to follow accounting practice standards and rules, and as a result, materially overstates the balance sheet and income statement. Y decides to lend the money to Company X based in large part upon what appears to be X’s robust condition per the financial statements. Had Bank Y been presented with properly prepared financial statements, Y would have never lent the money to X. Company X soon fails and declares bankruptcy, leaving Y as an unsecured creditor in the bankruptcy proceedings. Bank Y ultimately suffers tremendous loss.
In this case, Y does not have privity (or a contractual relationship) with Bob which generally is a requirement before a suit can be brought. However, negligent misrepresentation may be available as a cause of action where a party suffers injury due to justifiable reliance on the wrongdoer’s actions.
Intentional Acts by Accountants:
Again, the claims available to a wronged party may vary depending on the common law available in the applicable jurisdiction, but three common causes of action are Conspiracy, Aiding and Abetting and Concealment (also known as Fraud by Non-Disclosure). These claims usually arise when the accountant is not merely careless in the course of his or her work, but purposefully sets out to commit acts that injure either a client or a non-client. In Conspiracy claims, the accountant typically is working in conjunction with others where wrong-doing is occurring and as a result, a party is injured. The party does not necessarily have to be a client of the accountant. Aiding and Abetting claims are very similar except that the accountant does not have to do the bad act himself, but can still be culpable if he intends to assist or encourage the wrongdoer and a party is later injured. In Concealment, the accountant fails to disclose material facts in a situation where the accountant has a duty to do so. As a result of this lack of information, the wronged party suffers a material loss.
Example:
Laura, a CPA, has a close personal and business relationship with Joe, the owner of ABC Company. Joe wants to sell ABC to Deborah for the highest price and asks Laura to inflate the financial statements. Laura is aware that Joe intends to use the doctored financials to sell ABC at an amount unsupported by the company’s true condition. Laura prepares the statements, purposefully ignoring Generally Accepted Accounting Principles in order to make ABC’s past and future performance look rosy. Deborah relies on the financial statements and pays top dollar for ABC. Deborah later discovers after taking over the company that the statements are shams and she suffers great financial loss as a result. In this case, a cause of action for Conspiracy may be available to Deborah against Laura due to Laura’s intentional acts.
In Aiding and Abetting, there may be a cause of action against Laura even if she did not prepare the financial statements. If Laura knew that Joe was planning to defraud his buyer and she intentionally gave Joe assistance to that end, then Deborah may potentially be able to bring suit against Laura assuming Deborah suffered loss as a direct consequence of Joe’s fraud.
Laura may also be liable to Deborah under the Concealment cause of action since Laura failed to disclose the true financial condition of Joe's company via the financial statements to Deborah. Assuming Deborah did not know or otherwise would have had equal opportunity to find out the business's true condition, she may have a cause of action against Laura.