Butler Manufacturing Corp. planned to raise capital for a plant expansion by borrowing from banks and making several stock offerings. Butler engaged Weaver, CPA, to audit its December 31, Year 1, financial statements. Butler told Weaver that the financial statements would be given to certain named banks. When performing the audit, Weaver did not confirm accounts receivable in accordance with professional standards. As a result, Weaver failed to discover a material overstatement of accounts receivable. Also, Weaver was aware of a pending class action product liability lawsuit that was not disclosed in Butler's financial statements. Despite being advised by Butler's legal counsel that Butler's potential liability under the lawsuit would probably result in material losses, Weaver expressed an unmodified opinion on Butler's financial statements. In May Year 2, Union Bank, one of the named banks, relied on the financial statements and Weaver's opinion in giving Butler a $500,000 loan. Shortly after obtaining the Union loan, Butler began experiencing financial problems but was able to stay in business because of the money raised by the offerings. Butler was found liable in the product liability suit, a judgment Butler could not pay. Butler also defaulted on the Union loan and was involuntarily petitioned into bankruptcy. Union sustained a loss and Butler's shareholders lost their investments. Weaver's liability extends to various infractions. Assume that the majority rule for liability to third parties applies. Select from the option list provided the authority for each infraction listed below. Each choice may be used once, more than once, or not at all.
1.Liability to Butler for failure to confirm accounts receivable 1.Contract law and tort law.The accountant is implicitly bound by the contract to perform the engagement with due care (nonnegligently) and in compliance with professional standards. Moreover, an accountant must comply with the law and is responsible for exercising independent professional judgment. An accountant may be liable in tort for losses caused by the accountant's negligence. A tort is a private wrong resulting from the breach of a legal duty imposed by society. The duty is not created by contract or other private relationship. Ordinary negligence may result from an accountant's act or failure to act given a duty to act, for example, failing to confirm receivables. Compliance with professional standards demonstrates that the accountant exercised reasonable care and diligence and is therefore a defense against negligence claims. Accordingly, Weaver
is contractually liable to Butler (the contracting party) because of failure to exercise due care. Weaver also is liable in tort to Butler for ordinary negligence. 2.Liability to Butler for ignoring the lawsuit 1.Contract law and tort law.The accountant is implicitly bound by the contract to perform the engagement with due care (nonnegligently) and in compliance with professional standards. Moreover, an accountant must comply with the law and is responsible for exercising independent professional judgment. An accountant may be liable in tort for losses caused by the accountant's negligence. A tort is a private wrong resulting from the breach of a legal duty imposed by society. The duty is not created by contract or other private relationship. Ordinary negligence may result from an accountant's act or failure to act given a duty to act, for example, failing to confirm receivables. Compliance with professional standards demonstrates that the accountant exercised reasonable care and diligence and is therefore a defense against negligence claims. Gross negligence is failure to use even slight care. In extreme circumstances, an accountant may be liable for punitive damages if (s)he is grossly (not ordinarily) negligent. Weaver is contractually liable to Butler (the contracting party) because of failure to exercise due care. Weaver also is liable in tort to Butler at least for ordinary negligence and possibly gross negligence. Weaver ignored legal advice that material losses were probable.
