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Accountants liability for purely economic loss.

An Illinois appellate court ruled an accounting firm may be liable to a client for negligence causing only economic loss.

The Congregation of the Passion, Holy Cross Province--a Roman Catholic community--retained Touche Ross & Co. to perform a review of its financial statements and test the market value of its investments. Holy Cross's investment adviser had entered into a number of arbitrage transactions that necessitated this testing. Touche allegedly advised Holy Cross to report open arbitrage positions on a net cash paid basis (the difference between cost and selling price of the securities).

After Touche's review, it was discovered the market value of the arbitrage accounts was $2.4 million less than the investment adviser reported to Holy Cross. Holy Cross sued Touche and alleged various acts of negligence, including

* Touche's advice to report the transactions on a net cash paid basis.

* Touche's failure to confirm or test the market value of the securities.

* Touche's allowing Holy Cross's annual report to state the investments on a basis other than market value. Holy Cross alleged this mistake led it into believing the investment portfolio had greater value than was in fact the case.

At trial, the jury ruled in favor of Holy Cross on both its breach of contract and negligence claims. On appeal, Touche argued its duties to Holy Cross were governed strictly by a written contract--the engagement letter--and therefore it was improper to allow Holy Cross to also recover purely economic loss under a negligence theory.

Although the appellate court agreed that, generally, purely economic loss is inappropriate for recovery under a negligence theory, it noted an exception to this rule. Purely economic loss may be re* covered when a negligent misrepresentation is made against an entity in the business of supplying information to guide the business transactions of others. Consequently, judgment against Touche was appropriate under both a contract and negligence theory of recovery. (Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., 586 N.E. 2d 600)

Edited by Wayne Baliga, CPA, JD, vice-president, AON Corp.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Illinois
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1992
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