BILL ANALYSIS C.S.H.B. 505 By: Brimer 5-1-95 Committee Report (Substituted) BACKGROUND Certified Public Accountants (CPAs) licensed by the State of Texas perform tax, attest, consulting, and other public accountancy services for clients and issue reports on such services. Under current Texas law, a client is entitled to seek recovery from a CPA for economic loss due to reliance on the CPA's services and reports. This allows third parties to seek damages against a CPA for services rendered even though there is no contractual relationship. Therefore, a CPA becomes potentially liable to any person who receives the work. Other states have passed laws limiting those eligible to seek damages against a CPA for services to contracted clients and third parties that the CPA was aware of at the time the service was performed. PURPOSE The bill provides public accountants with limited liability for their services. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Title 4, Civil Practice and Remedies Code, by adding a new Chapter 91. Sec. 91.001 (1) Defines "accountant" as a person or firm holding a certificate or registration issued by the Texas State Board of Public Accountancy. (2) Defines "claimant" as a party, including a plaintiff, counterclaimant, cross-claimant or third party claimant seeking to recover damages. (3) Defines "client" as the party that directly engages an accountant to provide public accountancy services. Sec. 91.002 Sets forth limits of an accountant's liability on an negligence with respect to act or omission in connection with providing public accounting services to the claimant, except as provided in Section 91.003. Sec. 91.003 The liability limits in Sect. 91.002 do not apply: (1) where the claimant is the client; or (2) where the accountant: (A) was aware at the time the services of the accountant were engagement, or agreed with the client after the time of the engagement, that the financial statements or other information were to be made available for use in connection with a specified transaction by the claimant who was specifically identified to the defendant accountant; (B) communicated directly with the claimant concerning such financial statement or other information; and (C) was aware that the claimant intended to rely upon such financial statements or other information in connection with the specified transaction and communicated that awareness by words or conduct; or (3) to acts or omissions by an accountant involving fraud. Section 2. Effective Date - September 1, 1995. Applies only to a cause of action that accrues on or after the effective date. SECTION 3. Emergency Clause COMPARISON OF ORIGINAL TO SUBSTITUTE The original added Chapter 86, while the substitute adds Chapter 91. Sect. 91.001 includes a definition of "claimant" and "client" which were not included in the original. Sect. 91.002 clarifies the limits of an accountant's liability. Sect. 91.003 regarding exceptions uses the term "claimant" as opposed to "plaintiff" in the original. The substitute deleted Sect. 86.004 (A)(1) regarding the exception for plaintiffs who issued or was a successor of the person that issued such financial statements or information. The substitute also required the claimant to have "directly" engaged the accountant in the practices of certain accounting services. SUMMARY OF COMMITTEE ACTION H.B. 505 was considered by the Civil Practices Committee in a public hearing on March 1, 1995. The following persons testified in support of the bill: Fred Nemec, representing himself and Texas Society of Certified Public Accountants (CPAs); Robert Arms, representing himself and Texas Society of CPAs; S. Ike Guest, representing himself and the Texas Society of CPAs; Glen Whitley, representing himself and the Texas Society of CPAs; and R.C. Mann, representing himself. No one testified in opposition to the bill. The bill was referred to a subcommittee consisting of Representatives Moffat (chair), Culberson and Tillery. H.B. 505 was considered by the subcommittee in a formal meeting on March 7, 1995. The subcommittee considered a complete committee substitute for the bill. The substitute was adopted without objection. The bill was reported favorably as substituted to the full committee by a record vote of two ayes, zero nays, one present not voting. After suspending the 48-hour layout rule, the full Civil Practices Committee considered the subcommittee report on the bill on March 8, 1995. The bill was recommitted back to subcommittee. After being recalled from subcommittee, the bill was considered by the Civil Practices Committee in a public hearing on April 19, 1995. The committee considered a complete substitute for the bill and one amendment was offered to the substitute. That amendment was withdrawn. The substitute was withdrawn. The bill was left pending. On April 24, 1995, the chair referred the bill to a subcommittee consisting of Representatives Hilbert (chair), Sadler and Alvarado. By a record vote of five ayes, two nays, zero pnv and two absent, the bill was recalled from subcommittee in a formal meeting on April 27, 1995. The committee considered a complete substitute for the bill and one amendment was offered to the substitute. The substitute and amendment were adopted by a record vote of five ayes, two nays, zero pnv and two absent. The chair directed the staff to incorporate the amendment into the substitute. The bill was reported favorably as substituted, with the recommendation that it do pass and be printed by a record vote of five ayes, one nay, one pnv and two absent.