Would a public accounting firm be held liable to a third party (creditor) who extended money because on reliance of erroneous financial statements?
The specific example features a junior member of the accounting firm intentionally misrepresenting the accounts of the auditee.
To determine whether a public accounting firm would be held liable to a third party (creditor) who extended money based on erroneous financial statements, we need to consider certain legal principles and standards that govern this situation. Please keep in mind that I'm providing general information and not legal advice. It's advisable to consult a legal professional for specific guidance.
In such a scenario, potential liability of the accounting firm can be assessed based on the following concepts:
1. Negligence: A third party creditor might seek to hold the accounting firm liable for negligence if it can be demonstrated that the accounting firm breached its duty of care and caused harm through its negligent actions or omissions. This could include a junior member intentionally misrepresenting the auditee's accounts.
2. Proximate Causation: The third party creditor would need to establish that their reliance on the financial statements was reasonably foreseeable to the accounting firm and that the misrepresentation directly caused the creditor's losses.
3. Foreseen Users: The concept of "foreseen users" refers to the extent to which the accounting firm should reasonably foresee and anticipate that third parties, such as creditors, would rely on the financial statements prepared by the firm. If it can be demonstrated that the accounting firm should have reasonably foreseen the creditor's reliance, it may increase the likelihood of liability.
4. Privity of Contract: Generally, the accounting firm's duty of care is owed to its client, establishing a contractual relationship between them. However, some jurisdictions allow third parties to sue for negligent misrepresentation, even if there is no direct contractual relationship. The concept of "near privity" in certain jurisdictions permits third parties who are known or intended to rely on the financial statements the right to sue the accounting firm for their losses.
It's important to note that liability can vary depending on jurisdiction, local laws, and specific circumstances. Professional standards, such as those established by accounting regulatory bodies, may also be relevant in assessing potential liability.
To obtain a truly accurate and comprehensive answer tailored to your specific situation, I recommend consulting with a legal professional who specializes in accounting and tort law.