Printer Friendly

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)
COPYRIGHT 1993 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Security Pacific v. Peat Marwick
Author:Baliga, Wayne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jan 1, 1993
Previous Article:Despite controls, employer health plan costs keep rising.
Next Article:Third-party reliance on audit curtailed.

Related Articles
Ray J. Groves and Thomas L. Holton are AICPA Gold Medal winners.
SEC selects professional accounting fellows.
Flexible reading of rule 10b-5.
Officers' fraud on corporation's behalf bars recovery against auditors.
Judge finds for KPMG Peat Marwick in Renaissance litigation.
SEC selects 1993 accounting fellows.
SEC selects three accounting fellows.
New York appellate court expands liability for review services.
Court upholds privity defense in Illinois.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters