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goldengold
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Posted: 31 Dec 2009 at 16:14 \| IP Logged

does gross negligence (constructive fraud) has scienter?

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cpadpm
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Posted: 01 Jan 2010 at 10:05 \| IP Logged

Hi Goldengold:

Please note the folowing:

Fraud suggests there is scienter

Constructive fraud suggests Reckless disregard for the truth

What is the difference??

Scienter -- Making a statement with the intent to deceive

Reckless disregard for the truth -- Making a statement without validating its accuracy -- Not deliberately setting out to deceive but may achieve that result because as a CPA individuals will rely on your statements.

In short constructive fraud has no SCIENTER.

Hope that helps.

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goldengold
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Posted: 01 Jan 2010 at 17:03 \| IP Logged

thank you so much! CPAdpm, your explanation is very clear!!

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cpa0123
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Posted: 02 Jan 2010 at 13:29 \| IP Logged

Hi, I have a question:
Is constructive fraud same as innocent misrepresentation? If someone has committed a constructive fraud by reckless disregard for the truth, how is this an 'innocent' misrepresentation? Both do not have scienter, isn't it so?

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cpadpm
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Posted: 04 Jan 2010 at 11:22 \| IP Logged

Hi cpa0123:

I thought that you were answering a question. On reading your post i realize you are asking a question.

Here is my take on your question:

Constructive fraud -- has reckless disregard for truth -- What is that ?? the auditor makes a statement and did not bother to get it verified, of course it is false. He did not set out to deceive but achieve that end result.

Innocent misrepresentation -- Has no reckless disregard for truth nor SCIENTER BUT -- the auditor makes a statement, which he gets validated by an expert. The expert is subsequently proven to be wrong. The client is therefore deceived by the auditor's statement.

The auditor can still be sued under these conditions if the plaintiff can:

(a) prove a material misrepresentation
(b) prove that he relied on the statement
(c) The statement was intended to be relied on -- THE CPA THOUGHT IT WAS TRUE REMEMBER - THE EXPERT VERIFIED.
(d) Damages were caused.

The plaintiff may end up setting aside the contract -- Both parties being returned to the position they were before.

In Fraud and constructive fraud there can be damages in the form of cash and substantial risk to CPA reputation.

In innocent misrepresentation, the CPA credibility may remain intact.

Hope that helps.

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