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Accounting Malpractice: Negligence, Fraud, or Breach of Contract?

Accounting Malpractice: Negligence, Fraud, or Breach of Contract?

January 18, 2019
By Bary Gassman

Accountants have a duty of care to act in good faith and provide competent and diligent representation to their clients. When they are negligent in their duties, commit fraud or breach of contract, they can be held liable for accounting malpractice.

A Duty of Care

When a business owner or private individual hires an accountant, they expect the professional to handle the job correctly and as specified in the contract. After all, an accountant is bound to abide by the standards laid out by the Financial Accounting Standard Board (FASB) and the American Institute of Certified Public Accountants (AICPA). This includes the generally accepted accounting principles (GAAP) and the generally accepted auditing standards (GAAS).

Intentional or Negligent Acts

When an accountant violates GAAP or GAAS, intentionally or negligently, he or she has failed in the legal duty of care and is committing malpractice.

Breach of Contract

When an accountant departs from GAAP or GAAS, it is either a negligent or intentional act. Those acts or omissions could be considered the breach of contract. The written agreement between the accountant and his client will dictate what actions can be taken against the accountant when malpractice has occurred.

For breach of contract to be applicable, there must be an agreement between the client and the accountant must exist, the accountant must have failed to produce a specified result or follow GAAP or GAAS, and the accountant’s failure must have resulted in harm to his client.

Negligence

A claim of negligence is a type of tort that has resulted in damage to the plaintiff. To file a claim of negligence against an accountant, certain elements of proof must exist, including:

    • The accountant failed in providing a duty of reasonable care in providing his or her services
    • That duty of care would have been exercised in similar circumstances by other accountants
    • Because of the accountant’s actions, the plaintiff experienced damages
    • There is at least a causal relationship between the damages and the breach

Fraud or Misrepresentation

When an accountant has knowingly committed negligence or wrongful acts, such as embezzlement, he may make misrepresentations to hide his actions. A misrepresentation in itself is a negligent act. When establishing a claim of intentional misrepresentation, a plaintiff will need to prove that the information provided is false and that it caused damage. Gross negligence claims and intentional misrepresentations could result in higher awards for the plaintiff.

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