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Accountants owe a duty to some third parties.

The U.S. District Court in Massachusetts adopted the Restatement of Torts test in ruling that accountants owed a duty to a limited class of third parties who relied on their audited financial statements.

Fleet National Bank sued the CPA firm of Tonneson and Co. for negligence in auditing the financial statements of the Gloucester Co. (TGC). Fleet claimed it relied on allegedly faulty audits that Tonneson performed in 1989 and 1990 in loaning several million dollars to TGC. The bank alleged that, but for Tonneson's negligence, it never would have made the loans and, therefore, was entitled to recover the outstanding loan balances from Tonneson.

In response, Tonneson filed a motion for summary judgment, arguing that as a matter of law it owed no duty to Fleet, which was not a client. In reviewing this motion, the court noted the following allegations by Fleet:

1. Tonneson knew of the bank's loans to TGC.

2. Tonneson reviewed the loan agreements between TGC and the bank.

3. Tonneson knew at the time it performed its audit engagements that TGC was required under covenants in the loan agreements to provide audited financial statements to the bank.

4. Tonneson believed and expected TGC would provide to the bank financial statements that Tonneson had audited and certified.

The court ruled against Tonneson's motion for summary judgment, basing its decision on its review of four criteria: proportionality, predictability, uniformity and flexibility. Under the Restatement test, liability is limited to

1. Loss suffered by the person or one of a limited group of persons for whose benefit and guidance the accountant intends to supply information or knows the recipient intends to supply it.

2. Loss suffered through reliance on such information in a transaction in which the accountant intends the information to influence, or knows the recipient intends the information to influence, a third party.

This test strikes a balance between unlimited liability of the accountant to all third parties and no liability of the accountant to any third parties.

Considering what an accounting firm could do to protect itself from undue liability, the court further noted that it could place an appropriate disclaimer in the audit opinion itself, identifying those persons who are or are not entitled to rely upon its opinion. Under the Restatement test, such a disclaimer presumably would preclude a finding that a third party's reliance had been justifiable and would provide the accountant with a solid argument that an audit was not in any sense intended to influence the conduct of anyone other than specified beneficiaries. (Fleet National Bank v. The Gloucester Co., U.S. District Court, District of Massachusetts, C.A. no. 92-11812-REK, 8/8/94)
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Nov 1, 1994
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