Academic journal article Journal of Accountancy

British High Court Rules on Privity

Academic journal article Journal of Accountancy

British High Court Rules on Privity

Article excerpt

In news from overseas, the British House of Lords, in Caparo Industries PLC v. Dickman and Others, limited the right of third parties to sustain a negligence claim against an accounting firm.

Touche Ross audited the financial statements of a publicly held company, Fidelity PLC. The audited statements for the year ended March 31, 1984, revealed Fidelity's actual income for the year fell well below anticipated income. Based on this result, Fidelity's shares fell from 143 pence on March 1, 1984, to 63 pence by the beginning of June 1984.

Sensing an opportunity to take over Fidelity at a bartain price, Caparo Industries PLC began to purchase shares of Fidelity and subsequently acquired 100% of the company.

Caparo alleged at trial that its purchases of Fidelity shares were made in reliance on the audited financial statements that indicated income of 1,300,000 pounds when, in fact, Fidelity had suffered a loss of 400,000 pounds for the year.

The House of Lords stated the following tests apply in determining to whom the accountant owes a duty of care:

1. …

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