Academic journal article Journal of Accountancy

Alabama Supreme Court Rules on Privity

Academic journal article Journal of Accountancy

Alabama Supreme Court Rules on Privity

Article excerpt

In a reversal of a previous precedent, the Alabama Supreme Court ruled that it no longer will apply a strict privity standard in interpreting accountants' liability to third parties. Rather, it will look to the more liberal interpretation set forth in section 552 of the Restatement of Torts. Under the Restatement test, liability is limited to loss suffered (1) by the person or one of a limited group of people for whose benefit and guidance the accountant intends to supply information or knows the recipient intends to supply it and (2) through reliance on such information in a transaction that the accountant intends the information to influence or knows that the recipient so intends, or in a substantially similar transaction. This test strikes a balance between the accountant's unlimited liability to all third parties and no liability on the part of the accountant to any third parties.

This case began when Arthur Andersen & Co. was sued by two Secor Bank shareholders, who sued on their own behalf rather than suing derivatively on behalf of the corporation [the bank].

The two alleged Andersen had failed to disclose three years of losses resulting from millions of dollars in the bank's bad commercial loans. They claimed Andersen knew of these material losses and liabilities but failed to disclose them during three annual audits. …

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