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Auditor not responsible for client's 'deepening insolvency.' (Brief Article)

An Illinois appellate court ruled an insolvent corporation's auditors could not be held liable for failing to disclose the company's "deepening insolvency" that led to its bankruptcy.

The suit was brought against Arthur Andersen & Co. by J. William Holland, a trustee in bankruptcy for the American Reserve Corporation (ARC) estate. Holland alleged that had ARC and its investors and creditors known the true state of the company's financial condition, they could have taken various steps--such as replacing management, raising additional capital and preventing further bad business practices--in order to forestall ARC's deepening insolvency.

Andersen moved for summary judgment on the basis the only damages claimed by Holland were those of ARC's creditors. The circuit court agreed and ruled Holland had no standing to pursue these claims.

On appeal, the appellate court affirmed the lower court's dismissal, ruling the creditor's claim that ARC was attempting to sustain against Andersen were creditors' personal claims. As such, only the creditors, not the insolvent estate, could pursue the claims.

The court also was not persuaded by ARC's deepening insolvency theory, finding it no more than a veiled attempt to bring the creditors' claims in a different form. Consequently, the circuit court's summary judgment for Andersen was appropriate. (Holland v. Arthur Andersen & Co., 571 N.E. 2d 777)
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Article Details
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Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Feb 1, 1992
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