Part 10- Corporations, Chapter 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals, Doc 2

Duties of Professionals   Accountants have a duty to investigate suspicious circumstances, such as fraud or embezzlement, and to inform proper parties if they uncover wrongdoing. Failure to uncover fraud, due to negligence, typically results in liability for the amount of embezzlement that occurred after it should have been discovered. Professionals like consultants have a duty to make reasonable recommendations, and securities brokers must know their clients' financial conditions and investment objectives before recommending or executing transactions. Negligence or failure to follow these duties can result in liability for losses caused by inappropriate investments. Negligence and Liability   Negligence occurs when a professional fails to exercise the standard care and skill expected in their profession, which leads to harm. For instance, an investment banker may be liable if their careless valuation leads a client to overpay for an acquisition. Comparative and Contributory Negligence: Professionals are typically not relieved of liability even if their client is partially negligent, though some defenses like contributory negligence may apply in cases where the client failed to follow professional advice or provided misleading information. Auditors' Responsibilities   Audit Duties: An auditor is generally not responsible for detecting fraud or embezzlement, unless an ordinarily prudent auditor would have discovered it. However, auditors are required to investigate when suspicious circumstances arise. The Ultramares Rule limits the auditor's duty to nonclients unless there is a direct contractual relationship. In the Fehribach v. Ernst & Young case, the court ruled that while Taurus’s creditors couldn't sue Ernst & Young directly, the bankruptcy trustee could, because Taurus had the contractual relationship with the auditor. Fraud and Misrepresentation  Fraud occurs when a professional knowingly or recklessly misrepresents facts. For example, an accountant may be liable for fraud if they knowingly submit incorrect financial statements. Clients can pursue higher damages in cases of fraud compared to simple negligence, as fraud may include punitive damages. Breach of Trust  Professionals have a duty of trust to maintain the confidentiality of client information. Misuse of client information, such as using a client's secrets to buy securities for personal gain, constitutes a breach of trust. Liability to Third Parties  Professionals may also be liable to third parties (e.g., investors, banks) who use their work. For instance, a bank that lends money based on an overstatement in a financial statement may sue the accountant for damages. However, third-party suits are more limited, and courts often restrict nonclients from suing professionals unless their reliance on the professional's work was foreseeable. Securities Law  Federal and state securities law provides specific rights for individuals harmed by securities transactions. These laws often allow third parties (such as investors) to sue professionals like auditors or brokers, particularly for negligence or fraud. In summary, professionals like auditors, consultants, and brokers have significant legal and ethical duties to their clients, and can face liability for negligence, fraud, or breaches of trust. They may also be held accountable to third parties under certain circumstances, especially if their work product leads to financial harm.