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New York appellate court expands liability for review services.

A New York appellate court ruled that a third party could sue a CPA firm that performed services for a client.

In this case, the accounting firm performed bookkeeping and review services for its client, Globe Office Supply, Inc. Bank of Tokyo, a creditor of the company, alleged it agreed to extend credit to Globe based on financial statements prepared by the CPA firm. Globe subsequently went bankrupt. The bank brought suit against the accounting firm, alleging it relied to its detriment on the financial statements in extending credit to Globe and that the financial statements negligently misrepresented Globe's financial status.

The accounting firm filed a motion to dismiss the claim, arguing the bank was not in privity with it and therefore could not sustain an action against it. The trial court held there was privity because the accountants performed internal accounting services for Globe.

On appeal, the appellate court said an accountant who performed write-up services for a client was a de facto employee of that client. Accordingly, the firm did not act as independent accountants for Globe but, rather, served as internal accountants. Its staff's status as de facto employees established privity and allowed the bank to sue the firm for negligence. (Bank of Tokyo v. Saul N. Friedman, Appellate Division, First Department of the New York State Supreme Court)
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Title Annotation:Bank of Tokyo v. Friedman
Author:Baliga, Wayne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jul 1, 1994
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