An auditor's liability in civil action by investor is based on tort. This may be that the investor relied on the auditing report that was misrepresented and the investor sues for negligent misrepresentation.
However, auditor's liability for violation of securities laws is based on violation of statutes. For example, if an auditor fails to comply with security regulations.
The accountant may not be liable to the bank a third party using its auditing reports. The bank is barred from suing because it would be unknown that the audit would be used by them.
In order to sue the accountant, the bank needed to be a foreseeable user of their reports. But this may not have been the case. There was no information that the bank contacted the auditing firm directly or alluded to the firm that they would be using this information.
Refer to the case Citizens State Bank v Timm, Schmidt Co. to answer question as below:
Facts to this case
• An accounting firm made misstatements on a client's financial statements.
• A bank relied on the accounting's financial statements to lend money to the client.
• The bank was unable to receive payment on their loans and sued the accounting firm for malpractice.
The issue is whether the accounting firm is liable to the bank for their misstatement. Note that the debtor hired the accounting firm for their services; the bank is a third party which used the financial statements.
Relevant Terms, Laws, and Cases
Malpractice - is when a professional, such as doctor, lawyer, or accountants, work which results in an injury to another.
Analysis and Conclusion
The court held for the bank. They argued that:
• Historically, accounting firms are not liable to third parties for damages due to the accountant's work.
• However, the court found recent arguments that professionals should be liable to injured third parties to promote the duty of care of the professional in their service.
• The third parties that may sue for damages are those that the accountant may foresee to have received the accountant's work.
• Testimony reviewed that the accounting firm's employee had expected creditors of their client to review these statements.
Thus, the bank can sue for malpractice.