Academic journal article Journal of Accountancy

Third-Party Beneficiary Claim

Academic journal article Journal of Accountancy

Third-Party Beneficiary Claim

Article excerpt

A New York court ruled that a CPA firm does not owe a duty to a surety company that, when it extended surety bonding to a construction company, allegedly relied on financial statements the firm had audited. The surety company brought suit against the accounting firm after the construction company defaulted on jobs the surety company had bonded. The plaintiff alleged that, as surety for the construction company, it was a third-party beneficiary of the contract between the accounting firm and its audit client, the construction company. The plaintiff claimed that the sole purpose of the audited financial statements was to secure the bonding. Thus, the plaintiff argued, it was entitled to sue the accounting firm for breach of contract, which included an alleged failure to conduct its audits in accordance with GAAS.

The firm argued that the construction company had many reasons to obtain an audit, such as satisfying the requirements of its bank loan. The defendant also said it had audited the company for many years before it had a relationship with the plaintiff. If the plaintiff indeed was a third-party beneficiary, the defendant said, it would have the right to demand disclosures of client information. …

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