Brief Fact Summary. This is an appeal to the Court of Appeals of New York from two cases which both took on the issue of accountant liability to third parties for disclosures made in financial reporting.
Synopsis of Rule of Law. Accountants will not be held liable to third parties who rely on their financial statements absent privity, or a showing that the accounting firm knew or should have known that the party would rely on their statements in extending credit.
Facts. The facts of both cases are as follows:
* In Credit Alliance Corp. v. Arthur Anderson & Co., Plaintiffs brought suit against Arthur Anderson & Co. (Defendant) for failure to conduct investigations in accordance with proper auditing standards, when Plaintiffs relied on Defendant’s financial reports in lending money to another party. The lower courts denied Defendant’s Motion to Dismiss and certified a question to the court of appeals, regarding whether their order was correct.
* In European Am. Bank & Trust Co. v. Strahs & Kaye, the bank brought suit against Defendant for exaggeration of another company’s assets, which Plaintiff relied on in lending money to an insolvent company. In that case, the appellate division reversed a dismissal of Plaintiff’s complaint on the grounds that Defendant knew or should have known that Plaintiff was relying on their statements. A similar question was certified to the court of appeals for decision.
Issue. Whether an accountant may be held liable, absent privity, to a third party who relies to his detriment on a negligently prepared financial statement?