THE CASE FOR EDUCATING LEGALLY-AWARE ACCOUNTANTS Robert A. Prentice\" Accounting is not a trade; it is a learned profession.' Its practitioners must have the attitude and perspective of educated people, rather than the limited skills of mere trained techniciam2 The difference between a retired laborer who takes a tax preparation course from a tax-return preparation mill and a university-trained accountant lies largely (though not entirely) in courses taken outside the accounting d e ~ a r t m e n tJust as accountants need to know a little .~ * Ed &Molly Smith Centennial Professor ofBusiness Law, McCombs School ofBusiness, University of Texas at Austin. A professional is one who possesses a \"degree of responsibility, wisdom and concern for the public welfare, neither necessary nor commonly found in occupations not meriting the f description 'profession.\"' Robert K. Mautz, A b l i c Accounhq: Whuh Kid o Pr@ssionalirm, ACCT. HORIZONS, Sept. 1988, at 12 1. * For example, a recent study indicated that general communication skills are more important to the decision ofwhom an accounting f r should admit to partnership than are im matters of technical competence. S a k Bhamomsiri & Robert E. Guinn, 7 h e Road to Pa&ership in the ?Big Sir\" Firms; Implicationsfor Accounting Educatioq 6 ISSUES ACCT. EDCC. 9, 19 (1991). For this reason, the technical nature and narrow scope of accounting education has been criticized for as long as accounting education has existed. See PATRICKKEATING J. & s.F.JI~BLONSKY, CHANCING ROLES FINANCIAL MANAGEMENT: GETTINGCLOSE TO Or THEBUSINESS (1990)(criticizingaccounting education as being too narrow and technically 62 ' 598 / Vol. 38 / American Business Law Journal geography-\"The famous McKesson and Robbins case might never have happened if a junior member of an audit team had recognized that goods cannot be moved from Australia to San Franciqco by lorr)i\"'-they must know a lot of law. As Robert Mednick of Aridersen IVorldwide recently observed, while it is important that accountants master \"the increasingly complex web of technical principles, rules, and interpretations governing the reporting of financial transactions . .. another critical need. for practitioners as well as for students .. . is [an] understanding [of] the ethical, legal, and institutional imperatives underlying the practice of [the accounting profession].\"?' In this paper I discuss the importance of including basic legal education in a broad accounting curriculum and of including the subjects taught in the curriculum on the American Institute of Certified Public Accountant's (AICPA's) professional certification examination.\" 1 am prompted in part by the AICPA's current reexamination of the content ofits Uniform Certified Public Accountant (CPA)exam. In 1993, the AICPA's Content Validity Task Force recommended a reevaluation of the examination and the Board of Examiners appointed a new task force, the Content Oversight Task Forcc7 The Task Force is apparently considering reducing or focused: \"More a i d more it concentrates on formal accounting rules, with corresporidirigly less focus 011 essential business and social issues.\"); Irvin T. Nelson, I2;hd.r ,Vh Ahoiit Accoiintiq Education Change? An Historical Perspective on the Change Morlemmt, ,4CCT. HORIZOYS, UK. 1995, at 62, 63-64 ive discussion making similar points). C.W. Sobes, in AC ANTS' LIABKITY THE 1980s: AN INIERY,VI'IOYAI. IN \\'II;W 38 (E.P. Minriis & C. W. Nobes eds., 1985). Robert Mednick, Fo~ezwa~d HARRY T. M A Z71 OPI'OKI'UNI'I'IES, RESPONSIBII.ITIES, AND SEK\\'I( (not paginated in original) (1998 [hereinafter MA(:II.I.llOYl'l'OK, May 23. 1990, at 18 :notirig iri a differeiit context how in Washington the advantage is often \"not to thc most effective techriology, but to the technology with the best lobbyists ...\" :I; .\ thur S. Haycs, Broiidbnnd B(& SfuJi.~ to Beltwq~:I,ang-iluioifed Coue R u l i q Prorides More Gristf o r All Parties. N.4'I\"1.LJ.,,July11, 2000, at B1 (rioting that broadband data transmission is thc kcy to futurc success for ISPs and that who has acccss ro high-speed internet access via cable will t>p cleterrnined by whom the FCC arid Congress decide should regulate such service). Ifl See Margaret Jdne Radin &: R. Polk Wagner, The h@th OfPrknte Ordm'ng: Rrdiscoz>eiin,g &gal Realism in Cybmpace: 7 3 CHI.-KIY'I' RE\\'. 1295. 1295 1,1998) L. (noting the ncccsnity of a proper legal system even in Cyberspace because \"there can be no freestancling purely 'private' regime of property and contract.\"): Steven R. Salbu, L44o Should Goom the Internet; ~ilonitoringnndSi~pportingaJ~~II;rontier, I I HAK\\'.,J. &Tl;,ctj. L. 429,479-80 (1998'1 irioting the necessity of legal regulation of the internet and suggesting its proper mix). FIVAW:I,\\I SeeConstance E. Bagley, LegdProblernsShomkga 1Wy to doBminess, FT.COR,I TIAiI:S, Nov. 24, 2000, ar,ailnble at http://globalarctiive.ft.corri/~l~~~alarcliiv~/ articles,htnil?id=001 1310 11499&query=bagle Cfconstance YLaw has rarely been so important to managers . ..\"); hiitonia 11. Chayes et al., ,MnnqingYoourLau,yyers, 6 1 HARI'. Br.s. RI;\\ Jan.-Feh. 1983, at 84 (\":\\ decade of growth in the scope, nature. a d cornplexity of governnient regulation has catapulled attorneys into daily business operations to an unprececlentecl degree. The equally rapid rise in consumer, shareholder, employee, and competitor litigation has forc:ed prude111 managers to iriclirdr legal advice as an essential clcnient of business planning ancl clecisiori rnaking.\"). '' 1'3 _ ? 200 1 / Educating Legal&-Aware Accountants / 603 ranking them far above accountants and bankers.\"20 Because of the intrinsic importance of law in the business world, businesspeople taking university-sponsored executive education programs recently rated law courses as among the most important they took,21 and firms such as Lucent Technologies, Inc., Allied Signal, Inc., Allegiance Healthcare Corp., Conoco, Inc., Johnson &Johnson, and others have founded their own in-house law schools to teach their employees how to be legally-aware.\" 1 . &GAL ED~JCATION 1 IS PARTICULARLY IMPORTAN'I' THE TO ACCOUNTING PROFESSION. Just as business law has been a critical part of a general business education since business education first began,23it has also been a mainstay of accounting education from the very beginning. Indeed, law has been a part of CPA exams since New York administered its very first CPA exam in 1896.24It remains an important component of CPA exams administered in other nations around the world.25 Today, it is arguable that accountants, more than ever before and more than any others in business, need to be legally aware. This is true of company executives serving in the functional area of account- ? ' IOMA, Competitive Pressure, PARTNERS REPORTF'OK L 4 W F ~ R M OWNERS, 1999, May at 3. See George J. Siedel, Six Forces and the &gal Environment of h'mness: The Relative Value of Business Lnw Among Bm'mss School Cuurses: 37 AbI. BUS. L.J. 71 7, 727 (2000) (reporting on survey of three executive education programs at the Uiiivenity of Michigan). 22 See Mark Voorhees, Lucent's Law School Without Walls, LEGAL RMF& Nov. 29, 1999, at 23. 23 Joseph Wharton's grant establishing the first American business school in 1881 stipulated business law as one of thc five subjects that had to be included in the curriculum. See George Siedel et al.?A n Executiue Appraisal ofthe Impoltance gBm'nus Luw, 22 AM. BUS. L. J. 249, 263 (1984). 24 See 1996 is the One Hundredth AnniveIsaIy of the CPA Examination, http://weatherhead.cwru.edu/accounting/cpaexani.html (last modified Nov. 5, 1998) (reproducing the 1896 examination). 25 For example, to be a chartered accountant in England, OIIC must mastrr the basics of commercial and company law. See http://www.icaew.co,uk/thebigpicture/NewACA,htm. Canada, Hong Kong, Singapore, India and other nations have similar requirements. Id. 604 / Vol. 38 1American Business Law Journal ing (as they well recognize),'6 and it is certainly true of accountants working for accounting firms. A. The UbiquiQ offizwfor the Projssional Accountant It is difficult to conjure up a profession that is more shaped and constrained by legal rules or faces more legal liability than the accounting profession. The influence of law is ubiquitous in the accounting world. Only law students enter the business world with a greater chance of coming face to face with the legal system than accounting students. Indeed, one must suspect that some senior partners in accounting firms have spent a lot more time in courtrooms during the past decade than some senior partners in law firms. 1. Constraints Everywhere accountants are constrained by legal rules. Accountants doing tax work must know not only the tax rules of the rather substantialInternal Revenue Code (IRC)in order to properly give tax advice and prepare tax returns, they also must mind the many IRC provisions and Internal Revenue Service (IRS) rules that contain administrative, civil and even criminal sanctions against tax professionals who err. Under such provisions accountants may lose their privilege of doing federal income tax work,27 face civil fines, or even suffer criminal punishments if (a)they do such minor things as 6iling to sign a return or to give a copy to a taxpayer client,2R (b) they or commit such relatively more serious acts as disclosing client informa- 2,; In one survey of newly-promoted executives, seventy percent serving in a functional area designated . \"Rnance/ Accounting\" believed that business law is important for a w career in general managemcnt. Although all other functional groups also deemed business law to be importarit, the \"Finance/Accoiinting\" response was higher than any of' the others-highcr than \"General ManageInent,\" \"froduction/Operations,\" \"Research and 1)evelopmcnt,\" \"Marketing/Sales,\" and \"Persorinel/Industrial Relations,\". .. highcr even than the response for those working in the furictiorialarea denominated \"Law.\" Siedel et al., .rirpra notc 23, at 252. Acconi~t;uits, attorneys and others may have their right to practice before the IRS suspended or revokcd under Circular 230, Rules for Practice Before the Internal Revrnuc Service, 31 C.F.R. ??$lO.OO - 10.97 (19991. &t?gOZt?rAlb KC J. EKI'IIN .4lA131~KI' CG D. ~ I ~ A I ~ JR.,~ ~ ~ .4CCOUN'I'ANT'S GWDE TO TX(;AI. T.IARII.II'Y AM) ElHICS 165-67 I M THE , (1 993)jexplainingoperation of Circular 230 for accountants). 26 U.S.C. 5 6695 (2000)(civil penalty). '' ''' 200 1 / Educating Lgalb-Aware Accountants / 605 tion learned while preparing returns," helping promote abusive tax shelter^,^' or attempting to evade or defeat a tax.3' An accountant doing audit work must be aware of a plethora of SEC rules that supplement the various securities statutes passed by Congress. This network of rules provides numerous methods of punishing auditors who misstep.32 Accountants can lose their privilege to audit public companies:3 face civil fines:4 and even suffer '' 26 U.S.C. $8 6713 (civil), 7213 & 7216 (criminal). 26 U.S.C. $6700 (2000)(civil penalty). 26 U.S.C. $7201 (ILOOO) (criminal penalty). 32 One observer recently noted that: The SEC's arsenal [against professionals such as auditors] includes the following: Rule 2(e) [now 102(e)]ofthe SEC's Rules ofpractice and Procedure, 17 C.F.R. $Set. 201.2(e) (1994);civil injunctive actions brought in federal district court under 9 20(b) of the Securities Act of 1933 'Securities Act"), 1.5 U.S.C. $ 77t (1988 & Supp. V 1993), and 9 21(d) of the Sec rities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. $ 78u (1988 & Supp. V 1993);administrative proceedings under Scc. 15(c)(4) ofthe Exchange Act, 15 U.S.C. 0 780 (1988 & Supp. V 1993),stop order proceedings under 8 8(d) of the Securities Act to suspend the effectiveness of a registration statement, 125 U.S.C.5 77h (1988); report of investigation disseminated pu the Commission under Sec. 21(a) of the Exchange Act, 15 U.S.C. 5 78u Supp. V 1993); and entr), of an administrative order requiring any person to cease arid desist from violation of the federal securities laws under the Securities Enforcement and Penny StockReport Act of 1990, 15 U.S.C. $8 77h-1,78u-3 (Supp. V 1993). Marie L. Coppolino, Note, Checkosky, Rulp 2(e) and the Auditw: How Should t h Securities and .%change Commission Dtjine its Standard of Improper Profissional Conduct?, 63 FORDHAM RE\\'. L. 2227, 2227 n.1 (1995). '' 'The SEC may discipline professionalspracticing hrfore it under Rule 102je), 1 7 C.F.R. 4 201.102(e) (1999). See gmeralh Christine Neylon O'Brien, SEC Regulation ofthe Accounting Profession: Rub 2(e), 21 GONZ. RE\\:. 675 (1985/86) (describing the operation of the SEC L. disciplinary rule that has been renumbered to lO2jejj; Task Force on Rule 102(e) Proceedings, Rtpolt ofthe Tmk Force on Rub 102/e) Proceedingx RuL 102(e) Sanctions Against Accountants, 52 BUS. h %965 (19973 [,describinga serious controversy about the level of i ' . scienter required for imposition of administrative sanctions under Rule 102je)). See LOUISLOSS & JOFJ. SEI.IGMAN, 10 SFX:lJRl'~IES RE(;ULATIOS4906-10 (1993) (explainiIigprovisions). 3" 3' '' 606 / Vol. 38 / American Business Law Journal criminal penalties" for violating a complex web of federal securities regulations. An accounting professional doing consulting work must similarly breach of he legally aware of the various theories-negligence, contract, breach of fiduciary duty, deceptive trade practices, controlling person provisions,?' etc.-that can be windows to liability should they err. Thus, accountants have been sued in all manner of consulting engagements, including litigation support, software installation and other computer consulting,"" business turnaround 'I " Any intentional or reckless violation ofany provision ofthe 1933 or 1934 securities a c ~ s 3 78ff(2000) (1934 is a criminal act. Ste 15 U.S.C. 3 77x (2000) (1933 Act), and 15 L.S.C. Act'). Accountants have been criminally convicted ofviolations of thc fcdcral securities laws cvcn in cases where it was uncontested that GAAS and GAAP were complied with. Src Cnited States v. Simon, 425 F.2d 796, 812 (2d Cir. 19693. "' This is not to mention the fact that they must suffer the hectoring and moraiizirig by the SEC that seems LO constantly occiir. Former SEC Chair Arthur Levitt made repeated attacks upon the large audit firms in rcccnt years. See Nanette Byimes & Mike McNarnre, T i e SEC7:s. CPA.r: Sudderily ILS Hardball?BLJS. WK., May 22,2000. at 49 (describing repeated attack by Levitt). . i i See generally James K. Vines, Note, CPAs 11.7~0 Pefortn Managment Coruultzng sen:&^ Afiy Fate Incremed Exposure to Controlling Person LiabiliQ linder the Federal Securities Acts, 44 WIiSH. & Ll;.]: L. R1:V. 1079, 1079-1 102 j1987j (disciissing this potential avenue or imposing liability on CPA consultants). "' See Mattco Forge v. Arthur Young, 60 Cal. Rptr. 2cl 780 (1997) (reversing and remanding for nrw trial a $42 million judgment against accounting firm in a litigation >upport case). Thr case was later settled out of court. Seegermdb Barbara J. Duganier CG Everett P. H a r v , Smiidng the Liqation S~7~'icessJungle, T()[>.AY'S Sept./Oct. 1996, at 34. CP.4, 37 (discussing cases and rioting the "eroding barriers or liability for experts" in litigation support); Michael A. Crain et al., E x p d M / ; t n ~ s s ~ s m 3 e o ~ a r ~ ~ ? . J . Dec. 1991. at AcCrcY., 4 2,42 (noting potential liability of accountants serving as rxpcrt witnesses). '' See Diversified Graphics, Ltd. v. Groves, 868 F.2d 293 (8th Cir. 1989) holding Erriat & Whinncy potentially liable for failing to help plaintiff obtain an appropriate computer system for its data processing needs); FmeSues Deloitte: WriI.I. S.1. J.. Oct. 12, 1994, at B3 i ' (reporting on tiling of suit over breach of promise LO help plaintiffdrvelop a "world-class" nianufactiiring program); Elizabeth MacDonalcl, Maker OfGore-Tx Sues Peoples$ and Deloitte, e i\\7.,u,1. S.1'.J., Nov. 2, 1999, at B14 (reporting on the filing d a multi-million dollar lawsuit arising from an allegedly botched softwarc installation ; Elizabeth MacDonald, E-:Vfail Trail CouldHmtnl Consultantin Coud, WALLS'I .J.,June 19, 1997, at B1 (~iotingUOPlawsuit against AAndersen C~orisultirig over project to develop a new computer system). 200 1 / Educating Lgalh-Aware Accountants 1 607 consulting:' personnel con~ulting,~' feasibility consulting,*' and other types of consulting activitie~.~~ In addition, accountants whose clients are investigated by the IRS or SEC or the Department of Justice had best have familiarity with as well their ethical responsibilities of client ~onfidentiality,~~ as basic concepts of the Fifth Amendment's privilege against selfin~rimination~~ the limited existence of an accountant-client and testimonial privilege.46 Observers have predicted that accountants' (and clients') lack of familiarity with the complexities of the IRS Restructuring and Reform Act of 1998's privilege provisions may well lead to serious dificultie~.~' 'O See Matt Fleischer & Karen Donovan, Mq-Go-Round, Indeed, NAT'L L.J., Mar. 26, 2000, at A6 (noting $185 million settlement paid by Ernst &Young arising from a businessturnaround engagement). See Greenstein, Logan & Co. v. Burgess Marketing, Inc., 744 S.W.2d 170 (Tex. App. 1987) (accountant held liable for bad advice given to client regarding whom client should hire as comptroller). 42 SeePalmerv. Woods, No. 83-1388 Civ-T-I 0, 1998 lJ.S. Dist. LEXIS 15840 (M.D.Fla. 1988) (accountant held liable for hotel feasibility study). 43 See Union Planters v. Peat, Marwick, Mitchell & Co., 733 S.W.2d 509 (Tenn. .4pp. 1987) (holding accounting firm potentially liable for failure to properly evaluate and control plaintiff bank's lending practices). '' McP.4, CODE OF mOFESSION.41, CONIXJC?', ET Sec. 301 (1996). 45 See, e.g., Couch v. United States, 409 IJ.S. 322 (1973) (client's privilege against selfincrimination did not prevent government from forcing accountant to disclose client's records); In re Frank P. Hyde, No. 98-Civ-5691 (RDP), 1999 U.S. Dist. LEXIS 9892 (S.D.N.Y.June 25,1999) (holding that accoiintant did not have to turn his own records over pursuant to a subpoena in a bankruptcy proceeding because they were potentially incriminating). " Until passage of the IRS Restructuring and Reform Act of 1998, Pub. L. No. 105-206 (codified a amended throughout 26 U.S.C.), an accountant-client privilege did not exist at 5 the federal level. Seegeneralb United States v. Arthur Young & Co., 46.5 IJ.S. 805, 821 (1984). Rather, it existed in only twenty or so states that had accountant-client privilege f statutes. See Denzil Causey & Frances McNair, An Anabsis o State Accountant-Client Priuilege Statutes and h b l i c Poliy Implicatimfor the Accountant-Client Relationship, 27 AM. Bus. LJ. 535, 540 (1990) (analyzing these statutes). '7 See Alyson Petroni, Unpackingthedccountant-CentPriuilege i7nderI.R.C. Section 7525, 18VA. TL=. 843,873 (1999)(urging practitioners to proceed with caution in light of potential REV. confusion about scope of the privilege under the new law); Therese LeBlanc, Note, Accountant-Client Privihge: The Efect ofthe IRS Restructuring and Reform Act of1998, 67 U.M.K.C. L. REV. 583, 596 (1999) (voicing similar concerns). 608 / Vol. 38 / American Business I;na;,yournaL Accountants in every field face common law liability for breach of' contract,4" defamation,"' breach of fiduciary duty,'" fraud,r)"and negligence.j2 Numerous state law causes of action are brought against accountants under these theories, and others of statutory creation, such as deceptive trade practice statutes? Accountants can minimize liability, for example, by knowing how to ensure that 'I See. eg., .Jewish Ilosp. v. Boatmen's Nat'l Bank, 633 N.E.2d 1267, 1279 (Ill. 1994) (accountant held potentially liable to intended beneficiaries of a trust when had tax advicc reduced their inhcritance); CAE Inclus. Ltd. v. KPMG Peat Marwick, 597 N.Y.S.2d 402. 403 [".Y. App. Div. 1993;) (accountant held potentially liable forfaihrig to complete an audit by the prornisrd timej. "' See, eg., A4bella Barringer Rcs., Inc., 615 A.2d 288, 289 ("N. Super. Ct. Ch. Div. v. independent auditor sued for defamation over inforniatiuri contained in footnote in a corporation's financial report); Burke v. Deiner. 463 4.2d 963,969 PN:J. Ct. App. Super. Div. 1983)(accountants held potentially liable for allegedly defamatory statements contained in audit report); Williains v. Hobbs, 131 N.W.2d 85, 87 (S.D. 1964) (accountant sued for statements in audit report); Bailey v. Rogers, 63 1 S.W.2d 784, 786 (Tex. 1982) (accountant curd for defamation over statements made in a spedal rcport of partnership accounts). -"' Ste, f.g., Baldwin v. Kulch Assoc., Inc., 39 F. Supp. 2d 1 1 I , 1 19-20 (D.N.H. 1998) (accountantsued for breach of fiduciary duty); Elm City Cheese Co. v. Federico, 752 A.2d 1037, 10.52 ((lonn. 1999) (accountant held liable for breach of fiduciary duty to former client); Stewart Sr Co. v. KPMG Peat Marwick LLP, No. 602493/96 (N.Y.Snp.Ct.July 15. 1997:i (accounting fr held to have breached fiduciary duty to fonrier clirntj. im See, eg., Reisman v. KPMG Peat Marwick LLP, 965 F. Supp. 165 (D.Mass. 1997) (holding auditors potentially liable for fraud to investors in two corporations involved in a stock swap);.Joelv. Webber, 569 N.Y.S.2d 955,959-6 1 (App. Div. 199 1) (holding accountaiit potentially liable to singer BillyJoel on fraud claim); Bargerv. McCoy, Hillard & Parks, 462 S.E.2d 252 (N.C. 1995) (accounting fr held potentially liable for constructive fraud:]. im Fraud is, of courxe, often a criminal matter as wcll a grounds for civil suits. See, e.g., United s States v. Autuori, 212 F.3d 105, 121 (2d Cir. 2000) (rcvrrsing in part former Arthur Andersen partner's conviction on 12 counts of fraud arid conspiracy arising out of Colonial Realty dchacle); Lnited States v. White, 98-1424, 1999 1J.S. App. LEXIS 4235 (2d Cir. Mar. 5 , 19993 (aflirming in part and reversing in part criminal frand conviction of former Deloitte & Touche partner involved in Chris Bagdasarian scandal). .' There are literally hundreds if not thousands of accountant negligence cases. &See gazmd~ DAN GOI.DWASSER &THOMAS L. .4RNOLL), .~~COUN'I~ANTS'LIARIT.ITY4-1 4-89 to (1 999) (discussinglegal standards). j See, eg., Lyne v. Arthur Andersen & Co., 772 F.Supp. 1064, 1068 1P.D. Ill.) (holding accounting firm putentially liable undcr Illinois cnnsumer fraud statute); In re Prof. Fin. Mgrnt. Ltd., 703 F.Supp. 1388, 1397-88 (D.Minn. I889)(holding accountants to be within the coverage of the Minnesota corisurner fraud statute); Arthur Andenen & Co. v. Perry Eqnip. Cnrp., 945 S.W.2d 812,815 ~(Tex. 1997) (holding that user ofan audit report was a "consumer" with standing to sue accounting fir111 under state deceptive trade practices statutei. -'> 200 1 / Educating L-egalb-Aware Accountants / 609 engagement letters do not provide an opening for third-party contract or tort liability.54 They must know what steps to take to avoid thirdparty negligence liability in theirj~risdiction.~' They must know how to draft engagement letters to minimize liability via disclaimer^,^^ and how to evaluate liability insurance policies.\" In addition to federal and state causes of action, accountants are constrained by the rules of their state licensing boards, their national society (the AICPA), as well as state professional societies. The AICPA's Code of Conduct is a particularly daunting set of rules, but its importance cannot be gainsaid as it is often imported wholesale 54 Many courts hold that if the engagement letter does not on zts fme indicate that the parties intend to benefit a third party, then there will be no accountant liability to that third party even ifthere is substantial other evidence that the accountant knew the third party was relying on the accountant's work. See. e.g., Fireman's Fund Ins. Co. v. Glass, No. 94-civ-7375 (WK),1997 U.S. Ilist. LEXIS 7518 (S.D.N.Y., May 30, 1997) (holding that although the name of a specific intended beneficiary need not be included in an engagement letter before third-party beneficiary status is found, the parties' intent to benefit a third party such as plaintiff must be shown on the face of the contract); Mariani v. Price Waterhouse, 82 Cal. Rptr. 2d 671, 697-702 (Cal.App. 1999) (taking similarly restrictive view of accountant liability to intended third-party beneficiaries). 55 For example, in states such as Illinois and Arkansas that have passed special statutes limiting accountant liability to third parties, accountants should assiduously resist putting anything in writing that would indicate their knowledge that a third party is relying on their work. Absent such a writing, third-party liability will be extremely difficult for plaintiffs to establish. See, e.g., Doughertyv. Zimbler, 922 F. Siipp. 110, 115-19 (N.D.111.1996);Endov. Albertine, 812 F. Supp. 1479, 1495-96 (N.D.111. 1993);Robinv. Falbo, No. 91 C 2894,1992 WL 188429 (N.D.111. 1992). But see Chestnut Corp. v. Pestine, Brinati, Gamer Ltd., 667 N.E.2d 543,547 (Ill.App. 1996)(seemingto ignore the statute's legislative history in holding accountants potentially liable absent such a writing). 5b It is clear that a disclaimer that clearly indicates that a particular engagement is not an audit but only, say, a review, will generally be respected and recognized by a court of law. See, eg., William Iselin & Corp. v. Landau, 513 N.Y.S.2d 3 (N.Y. App. Div. 1987). O n the im other hand, a disclaimer along the lines of \"the f r will not be liable for its negligence\" is traditionally against public policy. However, a few recent cases recognize the validity ofsuch disclaimers, making them worth inserting in accountant engagement letten. Se e.g., Metro. e, Life Ins. v. Noble Lowndes Int'l, 643 N.E.2d 504,509 (1994)(enforcinglimitation ofliability clause in contract licensing software);Estey v. MacKenzie Eng'g., Inc., 902 P.2d 1220, 1223 (Or. App. 1995) (enforcing limitation of liability provision in an engineer's service contract). 57 EPSTEIN& SPALDING, mpm note 27, at 219-26 (instructing accountants regarding insurance options). 6 10 / Vol. 38 / American Business Law J O U V K Z ~ into state licensing rules, and violations are often the basic; for license forfeiture. jFI The very evolution of the structure of the accounting profession in this country is channeled by legal constraints. A decade ago virtually every accounting firm in the country was a sole proprietorship or a general partnership, yet today most are limited liability partnerships or limited liability companies. Why? Liability considerations drove the change.'" In Europe, the Big Five have acquired many of the largest law firms and now widely offer multidisciplinary practice (MDP).Go the United States, the Big Five have made only the most In tentative steps in that direction.(" Why? Legal constraints and SEC concernb2have made MDP a more problematic venture here than i'' See, eg., Boever v. S.D. Bd. ofAccountmc:y, 561 S.W.'Ld SOY 1,s. 1 Y Y i ) (upholding D. state board's revocation of accountant's license caused by his failure to coniply with GAAS and GAAP); Ray v. Tex. State Bd. of Pub. Accountancy. 4 S.W.3d 4'29,43 1-33 (Trx. App. 1999) (similar). S e e g n w a l ~Williarri D. Bagley, Unlimited Options, T<)DAk"sCPA,May/June 1995,at 2 I , (discussing advantages for firms of reforming as LLCs); Lee Berton 8r Joami S. Lubliii. Portnmhip Structure Is Called in Question rn LiahiLiQ Risk Rises, WAI,I, S7'.J.,June lo? l9Y2, at A1 (noting how law and accounting firms were moving away from the traditiorial general partnership structure in order to minimize liability);Edgardo E. Colon, Bzu-iness Lnu, Cpdldnte, Tils.B..J., Oct. 1993. at 908,9 1 3 (noting that every attorney should c:orisider rt.corrirr~e~iding to its clients facing significant liability lawsuits that they c.orisider thr LLP lorrri of organization). it, "'I See NEW YORK STAI'E BAR ASSOCIATION, REPORT 0 . 1' SPIXIAI. C:Ohl~ll'I''I'l:l.( I \\ M u l r l I - D I S ~ I l ~ L I N N i u P K n c l ' lAS11 ' 1 t i E L l : ~ ; A l . P I ~ O t E S S l O ~ (1999)(noting that Arthiir cl~ 36 i2ndcrsen had thc goal of bccoming thc largest law fr in the world by the year 2000 and im that in Europc the Big Fivc have acquired or created their own law firms in most major markets, including France where KPMG Fidal Pet Internatio~~al the largrst law firm;: is Jonathan Ames. Partners Who Slq4 u d h thp Enmy, ~NI>F,PEUI)ENl !T.ondon),Jiine I . 1999, at 12 (noting gcncral acccptancc of multidisciplinary practice in Europe, Australia. and Canada); Rocco Cammarrre, Innrmion o t h MDPs. NJ. T ~ \\ v . , May 24, 1999, at 1 (noting f similar acceptance in South America);. '" Ernst tli Young has raided the Atlanta law firm of King & Spalding for lawyers to form its Washington D.C.-based fr McKee Selson, Ernst & Young. See Geannc Roscnbcrg. im T.lrill Others Follorpi Enrst & 2'oung On Its Forqs Into L q a l Smires?, N,vI"I,LJ., 25, 2000, at Sept. B7. +\\\ tliur A4ndersenhas also forged a strategic alliance herween iZndrrnrn T.cgal in Singapore and the prominent New York law firm Weil, Gotshal & Manges. See Gcaniic Roscnbcrg.AndPrsen IxgalRreakrNh! Croundiiiith Wpil CotshalDeaL NAI"I.LJ., Aug. 14,2000, at BO. SeeJohn Gibeaut, MDPin SEC Crosshairs: Accountants May Cool Their lhge to i\\!fmgP, A. K. A.J,,Apr. 2000, at 16 (notiqg that SEC opposition is the major current deterrent to hlDPI. 200 1 / Educating hgalh-Aware Accountants / 6 1 1 across the pond.b3 Accounting firms have (Arthur A n d e r ~ e n ~ ~ and Ernst & Young6') or are considering (PricewaterhouseCoopers"") splitting into separate units in order to separate audit and consulting operations. Why? Legal considerations, especially in the form of SEC pressuretG7 again are responsible. 2. Magnitude ofliabilip Exposure The availability of all the liability theories noted in the previous sections led to what was legitimately termed a "liability crisis." Particularly in the early 1990s, there was reason to wonder whether the accounting profession could survive in any semblance of its thenexisting form. In the early 199Os, the Big Six accounting firms claimed that they faced as much as $40 billion in unresolved claims.G8 In 1993, accountants' legal costs exceeded one billion dollars.69 Indeed, litigation caused the demise of some firms, including Laventhol & Ho~wath.~" a time, insurance rates skyrocketed out For 63 In addition to SEC opposition on grounds that there is a potential conflict of interest between the audit function and the legal function, MDP arguably places accountants in a position where they are illicitly engaged in the practice of law. For general discussions of the MDP debate, especially within the legal community, see Lawrence J. Fox,.Nmi Firm: WoyUi Sheep's CZothing.! NKI"LL.J.,J~~. 24,2000, at A23; Geoffrey C. Hazard, 7% Ethical Traps o f Accounting Finn Laqers, NKI''L L.J., Oct. 19, 1998, at A27; Randy Myers, Laqers and CPAs: How the Landscape Is ChngingJ, ACCT., Feb. 2000, at 73. 64 See Securities Act of 1933-Rule Regulation S-X, I990 SEC No-Act. L E X S 943 (SEC ,July 9, 1990)(gaining SEC approval of new structure). 69 Ernst & Young sold its consulting arm to (:ap Gemini in 2000 for $1 1 billion. Louis Lavelle, Professionunal Services, Bus. WK., Jan. 8,200 I , at 134. Id. (noting that PwC will probably sell its consulting branch in 2001). Cup Shureholders Agee to ECYYDeal, MGbf'I. CONSULTANT INT'L, June 16, 2000, at 1 (noting that E&Y's sale of its consulting unit to Cap Gemini was "pronipted" by regulatory pressure from the SEC); Adrian Michaels & Lina Saigol, AuCMay Consider Sale o Corporate f (London),June 24, 2000, at 10 (noting that PwC's spin-off of its Finawe Lhit, FIN. TIMES consulting unit was partly driven by regulatory scrutiny). 68 See David Hellier & Roger Trapp, Accountants S h i m rn Cooer Slips Away; A h g u l Onslaught ir Scaring Oflmurers, INDEPENDENT (London), Aug. I , 1993, at 8. Donna H. K. Walters, Accountq firms Must Wutch iTheir P and Qs, L.A. TIMES, 4, s June 1994, at D2. "' See Lorana Sullivan, bnenthol und IIomuth Collu@scW7w Accounts for Accountants, OBSERVER, 25; 1990, at 29. Nov. '' '' '' 6 12 / Vol. 38 / American Business Law Journal of sight for small and medium-sized firms,7' and coverage largely disappeared altogether for the then-Big Six firm^.^' Caveat emptor was replaced by caveat a~ditore.~' Although thc liability crisis itself and accompanying insurance problems declined during the second half of the 1990s, the litigation crisis is far from over for accounting firms. As evidence, note the recent gigantic settlements such as Ernst & Young's $355 million settlement in the Cendant audit case74 its $185 million settlement and in the Merry-Go-Round consulting case.75 Several other ongoing cases appear to carry the potential for similar large outcome^.'^ In the midst of the liability crisis of the early 199Os, auditors particularly decried the existence of an "expectations gap," arising because judges and jurors supposedly were unable to grasp the true purposes ofan audit.77In that time frame, it was reasonably observed that "[accounting schools] need to have courses in the potential liabilities of accountants in concrete situations-not to moan about what happened, but to illustrate that this is the standard the rest of society is going to hold them to."78 To put it another way, Epstein and Spalding asked: "HOW accountants be made aware that their can '' See B& Six firms L u n c h hgaliittack. NATI L.J., Sept. 14, 1992, at 12 iyuoting position paper by Big Six firms). " See Michael Schachner, Bigsix Lasses Don'tL4ddup to Corm Crisi37SmallFirms, BI_S.INS., Nov. 22, 1993, at 3 (noting that insurance "capacity has all hut evaporated for Big Six firms, causing several to entirely self-insure."). 7'i Richard Murray, A K m j o m the UU?in ACCOUSTANTS' LIAU~LI'IY IN 'I'HE 1980 I S I ' l ~ K N / ~ l ' l O N : \\ I . ~ I I :71 :, 7 4 (E.P. Minnis & C. W. \\1 Nobes eds. 1985). &SeeShannon P. Duffy, Emst & Young Reacha $335 i2lil. Settlement in Cmdant Gorp. Case. :\\I, JYI'I:I,I,I(;ICNCLR, DCC. 1, 1999. 2 ' ' S P Matt Fleischcr & Karen Donovan, Mery[~o-Roun.d,Indeed, NA7''I. I,.J., Mar. 26. ~ 2000, at A G (noting settlement). 7, See, e.g., Ernst @ YoungAgain HnrJWPLnwsuil b Contest, W:V.l,sl'.J.~h ' h .20, 2000, at B2 (noting reinstatement of federal securities casc involving clairris of $100 niillion); Elizabeth MacDoriald, How a Ballpark Z Euolued Into a Burden For One of the Big Fr5 W d % I . l . p i8 S'l'.J., Feb. 18, 2000, at A1 (describing racketeering lawsuit by Emcore against its former auditor, Coopers & Lybrand (now PwC)); Debra Sparks?Ash+ at theiiudit?, Bvs.L W . , Mar. 6, 2000, at 150 (describing massive fraud involving a hrtlgr fiind that went ciridetrctrd for a substantial period of time). .^ brief rxplar " For of the expectations gap, see THOMAS SHROWK, J. A c C o v ~ r / \\ X Llnsll. ~l~ (1991); Bala V. Balachand Lmbilig in tfie United States, 2 J. ECON. MGMI..SI.KATI:C;Y & '"John Cushman, Failures Raise a ???&stion: Wio Does tfie AnalAudit?, N.Y. TlhtI:S, Dec. 6, 1992. ff 4, 11. f i (quoting Susan N. Koniak). 200 1 / Educating Ltgalb-Aware Accountants / 6 13 own (often self-serving)pronouncements and rules are quite properly viewed with a healthy cynicism by the courts, and are sometimes rightly overridden by judicially imposed standard^?''^" Absent an infusion of legal education, accountants who have mastered the technical standards of their craft are unlikely to be made aware that courts and juries can and sometimes do require them to do more.8o Given omnipresent legal constraints and potential liabilities for the professional accountant, reducing the amount of law that these professionals know cannot be a good idea. \"Practitioners who ignore the possibility oflegd involvement, or who fail to understand the legal duties that they owe to the users of their work product, will soon find themselves unable to conduct their professional practices in a profitable manner.\"*' Today's litigious environment means that accountants must practice defensively and it goes without saying that \"[tlo practice defensively, it's good to have an idea of the current legal landscape.\"82 B. Legal Knowledge Helps Accountants Do TheirJob Additional knowledge of legal rules can help accountants in a number of ways in addition to those already noted. \"The nature of an accountant's work necessarily brings him in touch with areas of law that he must comprehend in order to produce accurate computations and con~lusions.\"~~ anyone believe that an accountant can Does competently prepare an account for a trust estate without being familiar with the provisions of the Uniform Principal and Income O r that an accountant can competently prepare an account '' EPSTEIN SPAIDING, note 27, at 7. & supra See Pallais, mpra note 10 (\"mnsome cases, courts using 20/20 hindsight have required more [than compliance with professional standards and] it's helpful to know what else the courts think should be done.\"). JONAI'HANJ. DAVIES, CPA LIABILITY: MANLJAI. PRACTITIONERS A FOR v (1983). R2 Pallais, supra note 10. 83 Susan Schwab, Note, Bringing Down the Bar: Accountants Challenge the Meaning . f Unauthorized Practice, 21 CARDOZO L. REV. 1425, 1442 (2000). t14 The matter is further complicated, ofcourse, by the various versions ofthe act that have been promulgated and adopted in the various states. The latest version was promulgated in 1997. See UNIF.PRINCIPAL. AUD INCOME ACT, 7B [J.L.A. 3 (1997). However, the states have been slow to adopt the new version. See Patricia R.Beauregard &Jessie A. Gilbert, 'The Jvkw Enulronmmt in ConnectiGut,for the Investment and Management o Twt Assets, 14 QUINNIPIAC f PROB. L.J. 419,420-21 (2000). 6 1 4 / Vol. 38 / American Business Law Journal for a partnership without knowing the basics of partnership law?'' Is it unimportant for accountants to know whether promissoq- notes their clients hold or liens they have filed are enforceable?'" Is it irrelevant to accountants that their clients' titles to real estate or to personal property may be invalid? Tax practice zs law, and rather complex and confusing law at that."' There can be no doubt that knowledge of important legal concepts, such as rules of statutory construction8' and the role of precedent in our court system,8qare vital matters for all tax professionals to know. Inaccurate legal research is often the basis for accountant malpractice liability."' Indeed, given the intertwining of accountants' tax work and law, accountants also must know enough law to avoid illicitly engaging in its practice.'" And, given the CPA ,i- See Silverman v. Sydeman, 25 N.E.2d 215, 220 (Mass. 1940) (accountant's failure t o understand partnership law contributed to his client's inability to gain compensation for his work for (lie partnership). Iu' ,See Srhwab, supra note 83> at 1113 ("[A111 accountant must understand negotialdr in?truments, patent rights, corporate stocks and bonds, insurance policies, and other coritracts. ";. See James W. C~olliton,Standards, Rules, and thf DPcline oftlie Coiirts in the Laui O Taxation, J YY DICK. L. RE\\'. 265,265 (1995) ("The tax law is the most complex body of statutory law that exists in our legal system."). 8tl Nicole D. Stanger, Note, Carroll li. Commissioner: Xmmw Judicial Interpretations q f l n t m n l Rezmue Code$7502M~yCauseIncreaxdRurdm on Tnxfq~ers, AKKONL. RE\\'. 581.581 i 1997'1 30 j"A41tliough most of the tax law is enacted and amended by Congress, significant tax law has developed through ,judicial interpretation of ambiguously-worded statutes."). 11" Because different courts have different views not only- as to what particular tax statutes mean but also as to the importarice of precedent in making such determinations, graspiiig such subtleties is of extreme importance to tax professionals of all stripes. See Michael S. Smith, 'Third P a 3 Assi'rnmt, Statutes oflimitntions, and the T a x Re&nd Offret Act: Breathe a Little E1uj~-,Sli~d~lUend6ertts, f i j h Circuit iron YmarS'ide, 46VANI). L.RI:v. 443,444( 19933(noting tfie situation where disagreements as to meanings and value of precedent existed). ' ~ l ~ ~ ~ ~ \\ l . ~ ~ l A l P R l :, \\I' l'~ .~ Y ':l O ~ ~l l V I ,AYI) DI -4CPA's tax practice typically involves prepamtiun of Federal and state income tax returns, research to determinc the appropriate treatment of prospective and cornpletcd transactions. and representations of a taxpayer in admirristrative proceedings. Each of these may require an analysis of how statutory law. regulations, judicial dccisions, and administrative decisions and pronouncernerits may aRect a hxpayer's particular fact pattern, and this analysis will often invnlvc what is acccptcd as the practice of law . . . [so] the need to understand the boundaries established for unauthorized practice of law will increase. James R. Hamill, There is n Penalgfor Encroachment: CPAs and the Unauthorized Practice OfLrtri:. CP1.J.. Aug. 1998. at 32, 3R. 'I' 200 1 / Educating Legalb-Aware Accountants / 6 15 firms' continuing invasion into the field of estate planning,"' can it be plausibly maintained that they need no familiarity with the law of trusts and estates?g3 Auditors also need a broad base of legal knowledge for their work. They interact with Securities and Exchange Commission rules and guidelines every day. The numerous problems with revenue recognition that the SEC has noted in recent yearsg4are clearly indicative that auditors need to know more about contract law. Agreements that give the buyer total discretion to return the product and consignment arrangements do not produce binding contracts. In many recent cases,g5auditors allowed revenue recognition in such situations, making it appear either that they did not know what it takes to have a binding contract so that revenue might be properly recognized, or worse, that they didn't care. In doing their work, auditors must evaluate sales contracts, leases, and other transactions, claims of title to property (real and personal), the enforceabilityand priority of secured interests held by lenders, the rights and obligations of parties to commercial instruments, the validity of claims to insurance proceeds, and on and on. As the general counsel to a major accounting firm observed not too long '' See Associated Press, CPAs Laj Siege to Law Finns, Newswire, Nov. 25, 1998, at http://www.electronicaccountant.com/news/ 12598-4.htm (noting that "CPA firms are 1 grabbing lucrative new areas of business from the bar, especially in rich niches like taxes and estate planning"). '' SeeJewish Hosp. v. Boatmen's Nat'l B a d , 633 N.E.2d 1267, 1278-79 (Ill. App. 1994) (accounting fr held potentially liable in estate planning malpractice case). im See Carol J. Loomis, Lies, Damned Les, and Managed Earnings: The Crackdown is Here, FORTUNE, Aug. 2, 1999, at 74 (describing problem of managed earnings); Reva Steinberg &Roy Van Brunt, 1999AICPANatwnal C n m n e on SECDmelopnents, CPL4J.,Mar. I , 2000, ofec at 32 (noting SEC concern with earnin,p management and financial fraud, especially that involving revenue reco,gnition practiccs). " SeeArtJlurLeuitt Addmscs cWm'om''; SEC Oficiat's Concern OUerIntegri'ly oJ%'inancialStatemenb, J. ACCT., Dec. 1998, at 12 (quoting SEC Chair Arthur Levitt as saying that one wouldn't pop the cork on a bottle of wine before it was ready but that companies and their auditors were doing that by recognizing revenue on contracts where customers still had the option to void or delay the sale); Taking Sides: Fudge Hru .No Place in Financial Reports, INVISSI'MI~"'' NEWS, Apr. 3 , 2000, at 16 (SEC criticizing auditors for game of "nods and winks" with clients wherein clients are allowed to recognize revenue in sales that are not complete). "' 6 16 / Vol. 38 / American Business Law Journal ago, \"A basic understanding of business law is essential to the auditor in his task of categorizing transactions for accounting purposes.\"('(' A classic illustration of the need for this basic understanding of legal principles occurred in Herdeld u. Iaventhol,\"7 where the court admonished the accountants' actions in considerable detail, noting error after error that defendants had made by failing to appreciate essential legal principles.'\"'Red lights were flashing everywhere in the audit that gave rise to the Herded litigation, but the auditors' failure to understand and/or appreciate some relatively basic legal concepts Harris J. Amh o wit z~Tie L4ccoan~ing Pqfeuiori arid [lie L ~ z E i Misundmstood L'ictini, .J. '~ : De 356. Ariihowi~z was General Counsel of Coopers & Lytirand. ' \" 540 F.2d 27 12dCir. 19761 The judge noted, in part: The November 22 and 26 contracts came to Laventhol's attention oil or about December 1st through its partners, Cliazen arid Lipkin. and Schwabb, thc audit manager. Schwabb sought Lipkin'a advice about the proper way to report the transactions in the audit. Lipkin sought to gather the pertinent information by meeting with Scott. a FGLvice-president, and Firestone. Scott told him that FGI .was busy acquiririg the riecessary documentation. Fireston? said that the qrccments wcrc legitimate arid described Continental's principal, Max Rudcrian, as an cxperirncctl real estate operator anda.wralthyindividiial.I.a~~enthol Icarncd that Continental had a net worth of $100.000 arid that its assets consisted of \"mitiiature golf courscs phis u h e r asscts.\" Ruderiari's business practice wa.? to \"buy and resell prior to final ixyrrient on his sales coritracts.\" Lipkin also examined the sales contracts. He was an attorney but had only practiced one year. He concluded that the contracts wcre legally enforceable. He roiisulted ailother Laverithol partner who assured him that thcre need he no conccrii atmiit Rudcrian. Rudo-ian's references concurred in the appraisal. 1,ipE;in also coiisultcd ovcr the teleplioiir with a Los AIigeles atlorne!.. Tliz attorney did not scc the contracts, nor were the contracts in their entirely read IU him, dcspite thc fact that his ofices were only one-halfhour away by cab. Xeverheless. h e attorney gave a telephone opinion that they were valid and enforceable. The tirst tanL$blr results of Laveiithol's accounting efforts appear in it5 autlil rric:losed in its letter to FGT,. dated Decembrr 6, 1969. In the consolidated balance stieet a s of Sovemtwr 30, 1969. the amotirrt of $l.795,500 was rcrorded \"as rinrealizetl gross prolit\". The same rharactrrization was gi~ivcn this asslimed profit to in {hc income staterrierit with a refrreiice to an explanaton Note +. This Notr ouly rxplained the $1,795.500 by stating that \"because ofthe circimistanc~~ naturc of and thr transactions, $1.795,500 of the gross profit thereon will he considered realixeti whcn the.January 30. 1970 payment is received.\" Id. at 30-3 I . .E;vgmrml&vRanclall S. Rapp, A c c o a r i t u n t . c H ~ r ~ ~Lai~eritliol, ~i1. AkkJtcin, iIonamtlt & &nc!nt/i-?7re h n e t v ~f.~ctionsAr~~ilnbL~ to Inni:e~l.slors, J . CORI'. L. 395 i1976'1 (analyzingI the rase in detail'. '81, .-k:C'k'., May 1987, at 1111 200 1 / Educating Lgalb-Aware Accountants / 6 17 led to a finding of liability. As Miller and Brady have noted, Herzfeld illustrates that the CPA should have some understanding of at least the following areas of law: contracts, real property, suretyship, and corporations. It further admonishes the accountant to seek a legal opinion where there is doubt about the law in question. Finally, the court indicates that halfhearted attempts will undoubtedly be to no avail. The point is that the CPA must have sufficient knowledge of various areas of law in order to perform the audit. Adequate understanding is necessary both to recognize the legal problem and to realize that some help is probably neededr\" While many aspects of the audit task are becoming increasingly regardcomputerized (such as sampling and calculating),'oojudgments ing legal matters will continue to resist mechanization. The individual auditor's knowledge of and appreciation for legal implicationsand other aspects oftransactions will continue to be of critical importance in the future. Audit failures do not typically arise because samples were not drawn properly or numbers were not calculated accurately. Rather, a recent \"study by the California Society of Certified Public Accountants found that . . . CPAs lose liability lawsuits because of errors in judgment or mistakes committed due to lack of understanding of a transaction.\"lO'Can there be any doubt that a legally-aware auditor will be more effective than a legally-naive auditor? Similar conclusions can be drawn regarding consulting activity. Can an accountant truly serve the \"trusted business adviser\" role to which the profession aspires with no working knowledge of bankruptcy law? With no background in business organizations? With no knowledge of employment law or of potential environmental liabilities? If these matters are not tested on the CPA exam, they will not be taught in schools and accountants will go into the real world with next to no appreciation of these important concepts. O r consider the accountant as expert witness. Unless accountant experts can take relevant accounting expertise and meld it with '' RICHAKU MILLER, & GERAL.1) P. BRAIN, CPA LlABll,l'lY': Mlil:'l'lY(; 'I'HI'. 1 , . JR. CHALLFNGF. 986). 2 (1 I O U See David Coderre, Co~~$uter-Assistrd l'ec/iniques,for Fraud Detection, CPAJ., .4ug. 1, 1999, at 57 (notingthe increased use of computerized techniques to detect fraud); Peter Williams, I and Audil; Lauing Paper Behind, AGGI'. A c ; ~ Mar. 2,2000, at 22 (noting computerized T , revolution that is coming to audit field). \"I' Analysts corn% THOh4SON'S INT'I. RANK ,\\C:Cl ,.June 22,1992, at 4. 6 18 / Vol. 38 / American Business Law Journal "accepted legal theories," their testimony will be rejected by the courts arid serve no purpose.'" This, in turn, can feed the trend toward more malpractice suits against accountants sening as cxpert witnesses. 104 C . T h e Lnw Helfs Accountants Shape Their Environment. ; It would be a slight exaggeration, but no more, to state that thc accounting profession owes its very survival to its realization in the early 1990s that it functioned within a framework of legal constraint< that (a)threatened its existence, and (b)could be affected by lobbying activity. Rather than hide its collective head in the sand and ignore the legal system, the accounting profession proactively addressed the system in a very successful attempt to improve its business environment.'04 By 1993, the accounting profession had formed a lobbying group described as "one of the best financed and most powerful in Washington." '(li At the federal level, this proactive lobbying effort has produced impressive results for accountants. Due primarily to the political pressure exerted by the accounting profession and Silicon Valley firms, Congress in 1995 overrode President Clinton's veto to pacls the Private Securities Idtigation Reform Act (PSLRA). This law contained a number ofprovisions favorable to defendants in securities class action lawsuits, including provisions that (a)made it harder for '"'I "I.' See Joseph T. Gardenia11 111. As Inoestigntor and Expp/t W?twss>nn Experienced CPA Iti'll Cnlcihte nnd Prom Dnmnges in All Sorts of Cn.ses, T.r,(;.\\I.TIhW,h, Mar. 27, 2000, at 29 (notingthe necessity for a CPA expert to have "knowledge of the law"). "" SeMark Flanscn, ExpotrArt=Z,inble, Too, A.B..-\\J.. Nov. 2000, at 17 (notirig that lawsuits against exprrr witncxws "while still relatively rare, are miiltiplyirig"). Although accwuntanrs hired as arbitrators or appointed by- courts as experts have nften tried to claim judicial or qnaasi-judicial immunity for tlieir mistakes, several courts have rejected this defense. See, e..~., Ckimmel v. Ernst & Errist, 72 N.W.Pd 364: 368-69 (Minri. 1955); Levine v. Wiss & Ch.,1 7 8 A.2d 397. 402-03 (NJ. 1984;) I ( I In so doing, the accounting firms are following the lead of high-tech firms?which h a w rccrntly rcalizcd how they can improve the legal environment for their businesses by lobbying for favorable lcgal treatment. See 1,iz Alvarez, Oliinn I'olr in Corigras rJ 'Te~lj67 H&/ITech Lobby, IN'I"I. Hl;[ TKIH.. 19. 2000, at 14 (noting that technology firms are May playinga leading role in lobbying Congrcss in the geopolitical debate over trade with CXria:. Ed Roberts, Big Six Eirrns Branch Oul lu Craite Lobby. ibfflkirig Liabilig Ref