Third-party beneficiary claim.A New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of court ruled that a CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. firm does not owe a duty to a surety company that, when it extended surety bonding surety bond An insurance fee required before a duplicate security is issued to replace one that has been lost. The fee is approximately 4% of the market value of the security to be replaced. to a construction company, allegedly relied on financial statements the firm had audited. The surety company brought suit against the accounting firm after the construction company defaulted on jobs the surety company had bonded. The plaintiff alleged that, as surety for the construction company, it was a third-party beneficiary third-party beneficiary n. a person who is not a party to a contract, but has legal rights to enforce the contract or share in proceeds because the contract was made for the third party's benefit. of the contract between the accounting firm and its audit client, the construction company. The plaintiff claimed that the sole purpose of the audited financial statements was to secure the bonding. Thus, the plaintiff argued, it was entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: to sue the accounting firm for breach of contract, which included an alleged failure to conduct its audits in accordance with GAAS See gallium arsenide. . The firm argued that the construction company had many reasons to obtain an audit, such as satisfying the requirements of its bank loan. The defendant also said it had audited the company for many years before it had a relationship with the plaintiff. If the plaintiff indeed was a third-party beneficiary, the defendant said, it would have the right to demand disclosures of client information. This would place the CPA firm in the position of having to disclose client confidences to a third party--a possible breach of ethical standards. The court ruled that neither the CPA firm nor the construction company had intended to grant the surety company third-party beneficiary status. The court observed that the firm's engagement letter made no mention of the surety company, and the construction company did not specify that the company was to provide the surety company with audited financial statements. The court granted the firm's motion for summary judgment motion for summary judgment n. a written request for a judgment in the moving party's favor before a lawsuit goes to trial and based on recorded (testimony outside court) affidavits (or declarations under penalty of perjury), depositions, admissions of fact, answers . In this situation, prudent use of an engagement letter bolstered the case. Accounting firms should note in their engagement letters that the engagement is being undertaken solely for the client's benefit. Also, the letter should say that the firm will not disclose client information to a third party without permission. Firms should deliver financial statement reports directly to the client, not to the client's surety company or bank. Firms can thus make it clear that the parties did not intend for a third party to benefit from the engagement. (Fireman's Fund Insurance Co. v. Glass, 1997 WL 289858, S.D.N.Y., May 30, 1997.) |
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