Printer Friendly

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)
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
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.

Related Articles
Third-party reliance on reviewed financial statements.
Florida reverses privity ruling.
New York clarifies privity requirements.
Privity, statute of limitation in tax case.
Court dismisses securities claim.
New York court finds privity exists in accountant's case.
Court rules on privity.
Florida court favors Amex employee in holding-out case.
AICPA Files Successful Friend-of-the-Court Brief in Suit Against CPA Firm.
Keep Them Accountable.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters