The defendants owe a duty of care to the plaintiff. Any information negligently provided for the guidance of others is subject to liability for pecuniary loss caused to them by use of such information. Auditors should not give wrong information for the benefit of the company. Arguments against negligence There is no contract relationship between the auditor and the plaintiff hence the auditor has no liability to plaintiff. Harold Tod Parrott v. coopers & Lybrand, LLP (1998)
Harold Tod Parrot was the plaintiff in this case and demanded that the defendant Coopers & Lybrand were negligent through misrepresentation of facts and had a breach of fiduciary duty. It is a common law case that was decided at the supreme court of the state of New York (Coopers et all 1979). Facts of the case Pasadena was a private business providing investment advisory services. Pasadena employed Parrot and entered into a stock agreement. Parrot as a key employee would purchase 40,500 shares of Pasadena’s common stock for $28. 22 per share.
Parrot was to sell the shares at the time of termination to Pasadena at their fair market value. Parrot was terminated in May 1996 and coopers were told to do valuation report for determining the fair market value of Pasadena’s common stock. In the previous years coopers were producing valuation reports showing growth in stock. Coopers was influenced by Engelmann in 1996 to treat Pasadena as a company with hidden values. Tubbs (1990, p. 458) argues that, the change of methodology led coopers to produce inaccurate valuation of stock. Parrot accepted the price and sold he hares to Pasadena at the reduced price per share of $78.21.
Coopers had issued inaccurate stock valuation report for Pasadena Capital Corporation. 40,500 shares were sold by parrot a former officer and director of Pasadena at a price that had been determined by the report. Parrot claims that, the price was undervalued. Parrot sold the shares back to the company in less than a year after buying. Pasadena then went into a merger with another company where the shareholders received a higher rate of $144 per share plus an additional payment of $22 per share from Pasadena’s retained earnings. Judgment
The court decided that, there was no sufficient relationship between parrot and coopers upon which claims of negligence can be based by parrot. Coopers did not have any idea of parrot’s specific identity in Pasadena’s shares. The court held that, accountants are only liable for negligence to non contractual parties who rely on untrue financial reports under the following conditions; the accountants should have been aware that the financial information was to be used for a particular purpose. Accountants must have been aware that the financial reports were to be used for a specific purpose.
There must have been a witness available when the accountants were informed of the party’s reliance. The court did not extend any liability to the accountants coopers (Cushing et al 1983, p. 32). Arguments supporting negligence Accountant must be aware of the relationship of the company and the plaintiff. Accountants should be given details that the reports are for a particular purpose. Auditors are required to demonstrate knowledge that the financial statements will be relied upon by a third party. Such a situation, the auditor will be held liable for negligence.
Rusch Factors, Inc. v. Levin (1986) This was a common law case that found auditors liable for ordinary negligence to third parties who are not specifically identified to the auditors and the auditor were aware of the intentions of preparing the financial statements. According to Taylor (2000, p. 693) It is a litigation case. Facts of the case Leston Nay emigrated from Hungary to US when he was 18 years old. At Chicago he found a job after which he was laid off during a depression. When the American economy was recovering Nay found a permanent employment with Ryan-Nychols & Company which was a brokerage firm.
He was promoted as the company’s president and he later owned 90% of the company’s stock. The company was changed to First Securities Company of Chicago in 1945 and became a member of Midwest Stock Exchange. At that time Nay established his own customers and gave them an opportunity to invest in profitable fund that he managed by himself. The fund was known as escrow syndicate which was not an asset of First Securities of Chicago. Nay loaned the money from the syndicate to blue chip companies who would pay interests at a higher rate than the market rates.
As advocated by Biggs et al (1983, p. 241), the fraud was revealed in June 4the 1968 after Nay had shot himself together with his wife. He had left a note declaring that he had stolen money from his customers for over thirty years. He also claimed that the escrow syndicate did not exist. The defrauded customers sued for the recovery of their investments from Midwest stock exchange and the first securities of Chicago. The customers claimed on the grounds that the stock exchange did not investigate Nay’s background before they admitted him as a member.