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Third-party reliance on reviewed financial statements.

THIRD-PARTY RELIANCE ON REVIEWED FINANCIAL STATEMENTS

The West Virginia Supreme Court ruled an accountant who reviewed financial statements for his client can be liable for negligence in performing this review only to those parties receiving and relying on the report.

The accountant, Harry Crawford, of the firm Crawford and Graham, reviewed the financial statements of Erps Construction Co. for the period ended July 31, 1984. The First National Bank of Bluefield relied on the financial statements in extending credit to Erps. After Erps defaulted on the loan, the bank sued the accountant. The trial court ruled that in absence of privity of contract between the parties the bank could not win its case against the accountant.

In deciding the case on appeal, the West Virginia Supreme Court adopted the middle-ground position that, in absence of a contractual relationship between the parties, an accountant is liable only to those parties he knows will receive and rely on his report. (First National Bank of Bluefield v. Crawford, 386 S.E. 2d 310)

Ed. note: Thanks to Larry Wojcik of the Chicago law firm Keck, Mahin and Cate for discussion of the Crawford case.

Wayne J. Baliga, CPA, JD, vice-president, AON Corp.
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Author:Wojcik, Larry
Publication:Journal of Accountancy
Date:Apr 1, 1990
Words:199
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