Illinois Trial Court Rejects Privity Statute

By Baliga, Wayne | Journal of Accountancy, February 1995 | Go to article overview

Illinois Trial Court Rejects Privity Statute


Baliga, Wayne, Journal of Accountancy


An Illinois circuit court ruling limits the effectiveness of section 30 of the Illinois Public Accounting Act ("the Privity Act"), which defined statutorily the accountant's duty to third parties relying on financial statements.

The ruling stems from an action brought by Chestnut Corp. against an accounting firm, Pestine, Brinati, Gamer, Ltd., and a CPA sole practitioner, Robert Davidson. The case began in late 1988 when Chestnut became interested in investing in Alphatype Corp., a manufacturer of photo-typesetting systems. In making its decision on whether to purchase stock in Alphatype, Chestnut reviewed the 1987 and 1988 financial statements prepared and issued by Pestine. The 1988 workpapers also were reviewed by Davidson under an agreement with Pestine.

Sometime in 1989, a Chestnut officer also visited with Pestine. After this visit, the accounting firm provided workpapers to Chestnut, but the firm did not write a letter to Alphatype or Chestnut identifying Chestnut as a third-party reliant on those statements. Further, there was no contractual relationship between Chestnut and Pestine.

Subsequently, Chestnut purchased 82% of Alphatype's stock for $1.3 million and a $300,000 note. Shortly thereafter, Chestnut discovered material misrepresentations in the value of both inventory and accounts receivables. Alphatype lost a large amount of money after the stock purchase and filed for bankruptcy.

Accounting firm takes the initiative. After Chestnut filed suit against Pestine, the accounting firm moved for summary judgment in its favor on the grounds that under the Illinois Public Accounting Act, it owed no duty to Chestnut.

Pestine argued the act clearly states that accountants must send a written notification to the client and to a third party before the accountant can be liable to a third party.

In deciding for the plaintiff, Chestnut, the court rejected this argument on several grounds:

1. The act's express purpose, to "promote the dependability of information used for guidance in financial transactions. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Illinois Trial Court Rejects Privity Statute
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.