Alabama Supreme Court rules on privity.
This case began when Arthur Andersen & Co. was sued by two Secor Bank shareholders, who sued on their own behalf rather than suing derivatively on behalf of the corporation [the bank].
The two alleged Andersen had failed to disclose three years of losses resulting from millions of dollars in the bank's bad commercial loans. They claimed Andersen knew of these material losses and liabilities but failed to disclose them during three annual audits.
The trial court dismissed the shareholders' claim, stating it saw no evidence of Andersen's understanding that they were relying on the results of Andersen's work.
In arguments before the state supreme court, the plaintiffs said that, to their detriment, (1) they had relied on inaccurate financial reports certified by Andersen, (2) Andersen was aware the bank's annual reports were directed to shareholders and (3) the purpose of disseminating the annual report was to communicate to shareholders the corporation's financial condition.
Andersen argued that the only remedy that applies was a derivative action by the shareholders on behalf of the corporation, since Andersen owed no direct duty to individual shareholders.
In reversing the trial court's decision and ruling for the plaintiffs, the Alabama Supreme Court wrote that Andersen was aware the annual reports it was certifying were directed specifically to the bank's shareholders and these reports were relied on by shareholders as stating the true and correct financial status and condition of the bank.
In this case, the supreme court said, the plaintiffs were shareholders, a group Andersen knew would be relying on the annual reports to make investment decisions. (Samuel H. Boykin, Jr. v. Arthur Andersen & Co. 639 So. 2d 504)
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|Title Annotation:||Boykin v. Arthur Andersen & Co.|
|Publication:||Journal of Accountancy|
|Article Type:||Brief Article|
|Date:||Dec 1, 1994|
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