Academic journal article Journal of Accountancy

California Limits Accountants' Duty to Third Parties

Academic journal article Journal of Accountancy

California Limits Accountants' Duty to Third Parties

Article excerpt

In a major victory for the accounting profession, the California Supreme Court overturned the California Court of Appeals and ruled auditors generally owe no duty of care to nonclients.

The appellate court and trial court cases, previously reported in Legal Scene (JofA, Oct.90, page 29) arose from audits of Osborne Computer Corp. by Arthur Young & Company in the early 19808. To raise capital, Osborne had obtained bank loans that were secured by letters of credit from a group of investors. In return, the investors were issued warrants to purchase Osborne stock when a public offering occurred.

In September 1983, before the offering, Osborne filed for bankruptcy. The warrant holders and shareholders sued Young, alleging its January 1983 unqualified audit opinion failed to disclose various problems at Osborne before its bankruptcy.

The issue before the court was whether Young owed a duty of care to the investors. The Court of Appeals adopted a broad "foreseeability rule" under which an auditor could be held responsible to all parties who reasonably relied on Young's audit opinion and whose reliance was reasonably foreseeable by the "professionally sophisticated auditor."

The California Supreme Court rejected this rule, saying an auditor is not liable to nonclients unless the auditor knows the audit is being prepared for the specific benefit of a party or if the auditor engages in fraudulent conduct. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.