Academic journal article Journal of Accountancy

Accountants Owe a Duty to Some Third Parties

Academic journal article Journal of Accountancy

Accountants Owe a Duty to Some Third Parties

Article excerpt

The U.S. District Court in Massachusetts adopted the Restatement of Torts test in ruling that accountants owed a duty to a limited class of third parties who relied on their audited financial statements.

Fleet National Bank sued the CPA firm of Tonneson and Co. for negligence in auditing the financial statements of the Gloucester Co. (TGC). Fleet claimed it relied on allegedly faulty audits that Tonneson performed in 1989 and 1990 in loaning several million dollars to TGC. The bank alleged that, but for Tonneson's negligence, it never would have made the loans and, therefore, was entitled to recover the outstanding loan balances from Tonneson.

In response, Tonneson filed a motion for summary judgment, arguing that as a matter of law it owed no duty to Fleet, which was not a client. In reviewing this motion, the court noted the following allegations by Fleet:

1. Tonneson knew of the bank's loans to TGC.

2. Tonneson reviewed the loan agreements between TGC and the bank.

3. Tonneson knew at the time it performed its audit engagements that TGC was required under covenants in the loan agreements to provide audited financial statements to the bank.

4. Tonneson believed and expected TGC would provide to the bank financial statements that Tonneson had audited and certified.

The court ruled against Tonneson's motion for summary judgment, basing its decision on its review of four criteria: proportionality, predictability, uniformity and flexibility. …

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