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New York clarifies privity requirements.


The New York Court of Appeals clarified and strengthened the requirement that nonclients allegedly relying on an accounting firm's audit opinion must have a relationship sufficiently approaching privity before they can sustain a lawsuit against the firm.

Security Pacific Business Credit, Inc. claimed it relied on Peat Marwick Main & Co.'s 1984 audit opinion when loaning approximately $40 million to Top Brass Enterprises, Inc. In 1985 Peat discovered 30% of Top Brass's accounts receivable were uncollectible. In 1986 Top Brass filed for bankruptcy.

Security's primary basis for relying on the 1984 audit report was a single phone conversation between its vice-president and Peat's audit partner, in which the partner allegedly said the 1984 audit report would be the same as the draft audit, which indicated the audit opinion would be unqualified.

There was no other evidence Peat was notified that Top Brass's line of credit was conditioned on the 1984 audit opinion. There was, however, evidence that Security conducted its own independent examination of Top Brass's books in order to assess its accounts receivables before extending credit.

The court reasserted the test established in Credit Alliance Corp. v. Arthur Andersen & Company (65 NY2d 536), which held accountants are liable only if aware their financial reports will be used by a known third party for a particular purpose, their conduct links them in some way to that party and the conduct evidences understanding of the party's reliance.

The court noted Security's claimed relationship to Peat rose or fell essentially on the single unsoIicited phone call. Consequently, the court ruled Peat's work was clearly for the client's benefit and only incidentally for the use of others. Security Pacific v. Peat Marwick, 79 NY2d 695)
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Article Details
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Title Annotation:Security Pacific v. Peat Marwick
Author:Baliga, Wayne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jan 1, 1993
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