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Grant Thornton allowed indemnity claim against FDIC.

A federal court in Kansas ruled that Grant Thornton, the auditors of a failed savings and loan, was entitled to indemnity, or a 100% shift in liability from Grant to the FDIC as receiver of the failed institution.

Grant audited the financial statements of Rooks County Savings and Loan Association for the years 1984 through 1986. In 1986, Rooks began experiencing extreme financial difficulties and was subsequently closed by the FDIC.

Rooks and its 100% shareholder, the Comeau family, filed suit against Grant alleging its audits were performed in a reckless and negligent manner.

Specifically, it was alleged that Grant had actual or constructive knowledge that Rook's internal accounting controls were unreliable and certain loans were unacceptably risky, yet Grant's report had said the financial statements for the years 1984 and 1985 conformed to generally accepted accounting principles.

Grant, in its answer to the suit, denied all liability and sought to be indemnified by the Comeaus, Rooks and FDIC (as the successor in the interest to Rooks) for any amount it may be held liable for in the primary claim.

The FDIC argued before the court that Grant may look to be indemnified only by the individual directors and officers of Rooks and not Rooks itself or the FDIC as successor to Rooks. The court dismissed this argument, stating the common-law rule of imputing the wrongful conduct of a corporation's directors and officers to the corporation applies for the purposes of determining the FDIC's obligation to indemnify Grant. The court also dismissed the FDIC's argument that Grant should be held to the same standard of care as the directors and officers owed to the corporation. The court said directors and officers are held to a particularly high standard of conduct precisely because they owe a fiduciary duty not only to the corporation but also to the public. Under Kansas law, therefore, the accounting firm could seek indemnity for the FDIC for the negligence of the savings and loan's former directors and officers. (Comeau v. Rupp, 762 F. Supp. 1434)
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Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Date:Dec 1, 1991
Words:339
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