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Shareholders can't sue company's auditor for negligence.

An Illinois appellate court ruled a company's shareholders did not have standing to sue its accounting firm for negligence.

Stotler and Co. and its parent company, SGI, were in the commodities futures business. Coopers & Lybrand issued unqualified audit opinions for both companies for the periods ending December 31, 1988, and December 31, 1989; its audits found Stotler exceeded minimum capital requirements imposed by the Securities and Exchange Commission and the Commodities Futures Trading Commission (CFTC).

After the audit reports were forwarded to the SEC and the CFTC, the regulators also charged that a transfer of assets to SGI by Stotler (in exchange for various Stotler liabilities) to reverse a net capital deficiency was improper. The SEC and the CFTC then filed suit against Stotler.

In exchange for dropping the suit, Stotler agreed to revoke its registrations as a commodities futures trader and as a broker-dealer in government securities. Stotler's stock became worthless as a result and the company went bankrupt shortly thereafter.

Stotler's shareholders sued Coopers, arguing that if Coopers had identified the problem they could have either exerted pressure on SGI management to remedy it quickly or sold their shares before Stotler went bankrupt. Coopers contended it did not owe any duty of care to the stockholders, who therefore had no basis for an action against it.

In ruling for Coopers, the court said any injury to Stotler affected stockholders indirectly. The court found Coopers owed no duty of care to the stockholders and ruled that only Stotler had standing to sue the accounting firm for negligence. (Joan Cashman v. Coopers & Lybrand, 623 N.E. 2d 907)
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Title Annotation:Illinois
Author:Baliga, Wayne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jun 1, 1994
Words:268
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