Academic journal article Journal of Accountancy

Court Maintains Strict Privity Standard

Academic journal article Journal of Accountancy

Court Maintains Strict Privity Standard

Article excerpt

COURT MAINTAINS STRICT PRIVITY STANDARD

The U.S. District Court for the Northern District of Ohio was petitioned to enlarge the class of individuals who could rely on audited financial statements.

Northbrook Property and Casualty Insurance Co. issued insurance policies to Adjuster Auto Rental, Inc. that allowed Adjuster to pay Northbrook at the end of each policy period for losses incurred under the policies and paid by the insurance company. (In effect, Adjuster was self-insured and using Northbrook's policy to comply with state regulations.)

Northbrook, by funding these loss payments for Adjuster, became a creditor of Adjuster. When Adjuster went bankrupt, Northbrook allegedly incurred substantial losses for loss payments that were unrecoverable from Adjuster.

Northbrook filed suit to recover these losses against Adjuster's auditors, Lytkowski and Company, claiming Lytkowski specifically foresaw Northbrook's reliance on Adjuster's audited financial statements. Northbrook offered the following evidence:

* Lytkowski's accountant in charge of Adjuster's audit was aware Northbrook conducted business with Adjuster.

* Lytkowski sent Adjuster 23 copies of its audit report.

* Lytkowski approved the addressing of the chief executive officer's cover letter to "Our Business Associates," which accompanied the annual report. …

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