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Tennessee rules on privity.

The Tennessee Supreme Court ruled an accountant may be liable both to known parties and to parties the accountant should reasonably expect to receive and rely on the audit report.

Bethlehem Steel Corporation extended credit to W.L. Jackson Manufacturing Company. After Jackson defaulted on the loan, Bethlehem sued Ernst & Whinney (now Ernst & Young), alleging the firm negligently prepared the audit report Bethlehem relied on in extending credit to Jackson. Had it known Jackson's true financial condition, Bethlehem alleged, it would not have extended the loan.

The Tennessee Supreme Court weighed various approaches adopted by other states in defining an accountant's duty to nonclients. It rejected the strict privity approach, which holds an accountant may be liable only to those who are in privity of contract or near privity of contract with him or her. The court reasoned that the accountants' significant role in business and commerce mandated a greater duty to nonclients.

Conversely, the court also rejected the more liberal interpretation, adopted in a few states, that an accountant owes a duty to all parties that might reasonably be foreseen to rely on the audit. The court reasoned this standard creates an environment of potentially uncontrolled risk for accountants.

In adopting a middle ground, an accountant's liability was limited to parties that the accountant intended to rely on his or her report or to parties an accountant knew the client intended to influence with his or her report. (Bethlehem Steel Cornj?oration v. Ernst & Whinney, 822 S.W. 2d 592)
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1992
Previous Article:Four appointed to AECC; statement issued.
Next Article:Accountants liability for purely economic loss.

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