Ernst & Young not liable in ZZZZ Best case.A California appellate court A court having jurisdiction to review decisions of a trial-level or other lower court. An unsuccessful party in a lawsuit must file an appeal with an appellate court in order to have the decision reviewed. ruled Ernst & Young was not liable to Union Bank of California Union Bank of California is one of the 30 largest commercial banks in the United States. It has 327 branches, the majority of which are in San Diego, Los Angeles and Orange Counties. , which allegedly relied on Ernst's review report in extending $7 million to ZZZZ Best ZZZZ Best A company owned by Barry Minkow in the 1980s. Through such means as forgery and theft, Minkow appeared to be building a multimillion dollar corporation. ZZZZ Best went public in December of 1986, eventually reaching a market capitalization of over $200 million (U.S. Co. Z Best, a California company, failed in 1986 after authorities discovered a massive fraud involving fictitious customers of its carpet cleaning business and bogus revenue and income reports. Z Best's founder, Barry Minkow Barry Minkow (born March 17 1967) is an American religious leader and ex-convict. As a young teenager Minkow was a fraudulent entrepreneur who managed to present the front of a successful businessman for a number of years during the 1980s. , subsequently was convicted of a variety of criminal charges in connection with Z Best's operations and is now serving a long prison term. Ernst reviewed Z Best's financial statements for the three months ending July 31, 1986. A draft copy of this review report was contained in a preliminary prospectus Preliminary Prospectus A first draft registration statement filed by a firm prior to proceeding with an initial public offering of securities. The document, filed with the Securities & Exchange Commission, is intended to provide pertinent information to prospective shareholders for a $100 million stock offering by Z Best. Union alleged it extended credit to Z Best based on the preliminary prospectus, oral representation by Ernst that Z Best was growing and the reputation of the professionals involved with Z Best, including Ernst. The court, in ruling for defendant Ernst, cited several deficiencies in Union's case: 1. Claims by Union based on alleged oral representations by Ernst were barred by the statute of frauds Statute of Frauds: see Frauds, Statute of. , which requires that a representation concerning the credit of a third person be in writing to be admissible as evidence. 2. Ernst, because it issued only a review report, specifically declined to express an opinion on Z Best's financial statements. The report expressly disclaimed any right to rely on its content, which Union allegedly relied on in extending credit to Z Best. The report, in fact, stated that Ernst had not performed the audit work necessary to form an opinion about Z Best's financial statements for an interim period, let alone its overall financial condition, and therefore reliance on the report should be restricted. 3. Union could not rely on California case law that states an independent auditor Independent Auditor An external auditor with a certified public accounting designation that qualifies him or her to provide an auditor's report. Notes: These auditors aren't affiliated with the company being audited. owes a duty of care to reasonably foreseeable plaintiffs who rely on its report. The court noted this duty extends only to cases in which the accountant issues unqualified audited financial statements. Furthermore, in this case, Union conducted its own extensive independent investigation before extending credit to Z Best. (Union Bank v. Ernst & Whinney, 91 Daily Journal D. A. R. 2347) |
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