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Florida reverses privity ruling.


In a setback to auditors, the Florida Supreme Court reversed the favorable appellate court ruling in First Florida Bank v. May Mitchell and Company. As reported here previously, a Florida appellate court refused to hold an accountant liable for negligence or gross negligence to a third party despite the accountant's specific knowledge of reliance by this party on his audited financial statements (see JofA, Oct. 89, page 22).

In reviewing the case, the Florida Supreme Court posed the following question: When an accountant fails to exercise reasonable and ordinary care in preparing the financial statements of his client, and when the accountant personally delivers and presents the statements to a third party knowing the statements will be relied on by the third party to loan to or invest in the client, is the accountant liable for the damages suffered by the third party despite a lack of privity between the accountant and third party?

In answering this question, the Florida Supreme Court found an accountant may be held liable for damages suffered by third parties not in privity that resulted from the accountant's negligence if the accountant knew those third parties would rely on the accountant's opinion. An accountant is not liable to third parties whom he or she merely should have known would rely on his opinion.

Although this decision overturned a strict privity standard in Florida, it did not adopt the liberal standard of some states that holds an accountant liable to all persons who reasonably might be foreseen as relying on his work product. Also, the ruling was based on facts particularly favorable to the plaintiff, First Florida Bank, since the accountant not only negotiated the loan in question but also personally delivered the financial statements to the bank. Under less adverse facts, a lower court may be able to distinguish the Mitchell ruling and maintain a conservative privity standard in Florida. (First Florida Bank v. Max Mitchell and Company, 15 FLW S125, March 9, 1990)

Ed. note: Thanks to Guy Hohmann of Brill, Sinex and Hohmann for the Mitchell case.

Wayne J. Baliga, CPA, JD., vice-president, AON Corp.
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Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Date:Jun 1, 1990
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