Herman hires Juanita as his accountant. Juanita commits ...

[ARLKQ]

Herman hires Juanita as his accountant. Juanita commits negligence in preparing financial statements for a business Herman owns. Several investors rely on the financial statements and purchase shares of stock in the business. In a state that has adopted the privity rule, what result?

Question 2

Horseco, a new business, purchased ten thoroughbred horses for racing and breeding purposes. It hired John, an accountant, to prepare financial projections of anticipated future earnings for the first five (5 ) years of the new business. The information provided to John as the basis for the projections included assumptions made by Horseco about anticipated earnings from racing and breeding. The assumptions were based on Horseco's experience and were not based on objective standards that could be examined by John. John included with the projections a disclaimer that stated that the income projections were based on assumptions provided by Horseco and that John assumed no personal responsibility for the accuracy of those projections. Subsequently, the Larson Company purchased a fifty (50 ) percent interest in Horseco, and when Horseco's income did not match the projections, Larson sued John for accounting malpractice. How will the court decide?

[ndhahbi]

Answer to Question 1

The privity rule holds that only the accountant's client may sue an accountant for malpractice. Therefore, any investors who rely on the incorrect financial statements are prohibited from recovering for their losses.

Answer to Question 2

Judgment will be for John. Disclaimers permit an accountant to limit or disclaim liability if, under the circumstances, it is unreasonable to expect the accountant to stand behind certain information and the disclaimers make it clear that the accountant does not vouch for the disclaimed information. In this case, the assumptions regarding future income could not be objectively verified by John, and it would therefore be unreasonable to subject John to liability when future earnings failed to meet Horseco's projections.