Academic journal article Journal of Accountancy

Third Parties Can Rely on Auditor's Work

Academic journal article Journal of Accountancy

Third Parties Can Rely on Auditor's Work

Article excerpt

Florida appellate court ruled that a client's notice to an accounting firm that said the client needed audited financial statements for multiple parties entitled those parties to rely on the accountant's work and later to bring suit against the accounting firm. Lake Technologies retained Ernst & Young to audit the company. While the firm was working on the audit, the company's president advised the firm that these statements were urgently needed to obtain bonding, increase a line of credit, obtain favorable credit from suppliers and submit bids on projects in other states.

In alleged reliance on the financial statements, a surety bonding company issued payment and performance bonds to the client. After the surety company was required to pay the bonds, it sued the firm for negligence in preparing the financial statements. The surety company alleged the firm had failed to disclose the clients substantial debt to the IRS. The firm responded by filing a summary judgment motion, stating the surety company was not a client of the firm and therefore the firm owed it no duty. The trial court granted the firm's motion for summary judgment.

On appeal, the court reversed and remanded the trial court's ruling. The court noted that under Florida law, the firm owed a duty to a limited group of parties for whose benefit the accountant knew the client intended to supply information from die audit. …

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