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Court maintains strict privity standard.


The U.S. District Court for the Northern District of Ohio was petitioned to enlarge the class of individuals who could rely on audited financial statements.

Northbrook Property and Casualty Insurance Co. issued insurance policies to Adjuster Auto Rental, Inc. that allowed Adjuster to pay Northbrook at the end of each policy period for losses incurred under the policies and paid by the insurance company. (In effect, Adjuster was self-insured and using Northbrook's policy to comply with state regulations.)

Northbrook, by funding these loss payments for Adjuster, became a creditor of Adjuster. When Adjuster went bankrupt, Northbrook allegedly incurred substantial losses for loss payments that were unrecoverable from Adjuster.

Northbrook filed suit to recover these losses against Adjuster's auditors, Lytkowski and Company, claiming Lytkowski specifically foresaw Northbrook's reliance on Adjuster's audited financial statements. Northbrook offered the following evidence:

* Lytkowski's accountant in charge of Adjuster's audit was aware Northbrook conducted business with Adjuster.

* Lytkowski sent Adjuster 23 copies of its audit report.

* Lytkowski approved the addressing of the chief executive officer's cover letter to "Our Business Associates," which accompanied the annual report. The auditors were able to identify Northbrook as one of Adjuster's business associates.

* The auditors had a document in their files indicating Northbrook's reliance on Adjuster's financial statements.

The court rejected this evidence as insufficient to establish a duty running from Lytkowski to Northbrook. The court found flawed Northbrook's claim that the law required proof that the auditor specifically foresaw that a certain class of persons would rely on the auditor's representations and that Northbrook was a member of that class.

Instead, the court ruled that a more reasonable interpretation of the law in Ohio is a finding that the auditor had a specific awareness the third party was a member of the class whose reliance on the financial statements was foreseen by the auditor. The sole criterion of class membership is being foreseen by the auditor. Consequently, the court granted summary judgment in favor of Lytkowski and Company. (Northbrook Property and Casualty Insurance Co., et al. v. Lytkowski and Company, Inc. Civil Action no. C87-2974)
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Article Details
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Publication:Journal of Accountancy
Date:Dec 1, 1989
Previous Article:Foreign corps must conform their tax year.
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