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05/02/2012

Accountants' Liability In Negligence


Accountants' Liability In Negligence

Question 1

A. What is the distinction between consequential economic loss and pure economic loss in negligence?

            Common law courts differentiate economic losses which are ‘consequential’ upon physical damage and those which are considered as ‘remote’ from or entirely not connected to the given damage, which is known as the pure economic losses. Consequential economic losses are those losses which go after and pursue ‘immediately’ or ‘directly’ from the reason behind the physical loss (van Boom & Koziol 2004). Thus, it pertains on the penalties and costs of harmful consequences to other legal interests of the victim or to his patrimony in general (Banakas & United Kingdom National Committee of Comparative Law 196). It is sometimes called parasitic loss, thus it is recoverable because it presupposes that the presence of physical injuries – this is exactly different from the next type of economic loss is the pure economic loss (Bussani & Palmer 2003). Pure economic loss pertains on the negative cast and the patrimonial character of that loss, thus it is loss without antecedent harm to plaintiff’s person or property (van Boom & Koziol 2004).

B. How does the floodgate principle constrain the right of claimants to claim damages for pure economic loss in negligence? Use case law examples to support your argument.

            Restriction is given in the compensation and claim for pure economic lost in tort law, this is because without restriction, the liability of the tortfeasor would be unlimited and unreasonable. A decisive factor is floodgate argument, wherein “the defendant would be exposed to a liability in a determinate amount for an indeterminate time to an indeterminate class.” This means that if the “tortfeasor were extensively liable for pure economic loss, then everyone would run an incalculable risk by acting negligently, therefore, the threat of over-deterrence would arise.” (van Boom & Koziol 2004).  Therefore, the fear of the court to receive flood of claims affect the right of claimants to claim damages for pure economic loss in negligence. One of the examples is the case of Donoghue v. Stevens [1932], which introduces the ‘neighbour principle’ which limit the number of sustainable claims. Another is the case of Falzone v Busch [1965] 45 N.J. 559, the court feared that by allowing claim will result in a flood of litigation because there is no evidence that there is an excessive number of actions and there was an excessive number of cases of this type.

Question 2

A. Describe the extent of an accountant’s liability to non-clients through the cases of Hedley Byrne v Heller [1963], Caparo Industries v Dickman [1990] and Royal Bank of Scotland plc v Bannerman Johnstone Maclay [2003].

            The accounting profession has widened an engagement risk approach which decreases the liability of accountants to non-clients (Pacini & Sinason 1998). Different jurisdiction have enacted codifications of privity limits for the accountants, which limit the liability of the accountants towards the no-clients to a specific third parties that have been specified and mentioned beforehand by some formal categorization such as written notice and contract between the client and accountant (Glusman & Ciociola 2006).

            In the case of Hedley Byrne v Heller [1963] shows liabilities with the third party. The auditor have to consent to anyone to keep on depending on the accounts on which he or she has accounted, but now finds to be forged, if there is any opportunity of the third party acting to his loss in the course of dependence on the false accounts. An accountant might be alleged to be responsible and at fault of deception or held to be civilly accountable in negligence to the non-clients if he or she knew that the accounts that he or she had been submitted to a third party as an encouragement to the third party to do something thereon and he fail to notify the third party on determining the falseness of the accounts before the third party had acted to his loss. And in the case of a listed company an accountant required in some condition to deem whether he should notify the appropriate Stock Exchanges of what he had exposed. Before making such communication, therefore, he should seek legal advice regarding his responsibilities and rights in the given situations of the case, as to the method of any communication he or she settles on to make and as to the terms in which communication should be made (COE 2005).

            The case of Caparo Industries v Dickman [1990] shows the limitation of the liability of auditor to the third party. Even though it was foreseeable that shareholders and others might depend on the audit report, in the process of decision making in order to purchase additional shares in the company, the accountant has no duty of care owned to the shareholders because, according to the House of Lords, the purpose of the report was controlled and limited by the statue to allowing and facilitating the shareholders to exercise their proprietary interests in the overall management of the company (von Bar & Drobnig n.d.). Thus, it shows that if there is no clear evidence that the auditor knows, as opposed to foresees that his or her report will be possibly used by some identified person for a given or specific reason (von Bar & Drobnig n.d.). 

            The case of Royal Bank of Scotland plc v Bannerman Johnstone Maclay [2003] enables to bring comfort to many accountants. The Court of Session in Scotland ruled that the auditors of a company could only owe a duty of care to the non-clients or third parties, the lending banker of the client, if they are informed or knowledgeable that the bank would rely or depend on the audited accounts of the client. The auditors had not disclaimed liability. Thus, it shows that an accountant could only be liable if he is informed and knowledgeable that the bank or non-client will use or rely on the information provided by the accountant. In connection to that knowledge and awareness, by missing out to send a disclaimer to the bank, rather than any positive action and activity done by the auditor or accountant, supported the presence of a duty of care (Curd & O’Connell 2006). With this current court decision, it had been able to help in order to improve the limitation of liabilities of accountants towards the non-client or extended network of accountant’s client.

References

Banakas, E & United Kingdom National Committee of Comparative Law, Civil Liability for Pure Economic Loss, Kluwer Law International.

Bussani, M & Palmer, V 2003, Pure Economic Loss in Europe, Cambridge University Press.

COE 2005, Code of Ethics for Professional Accountants, http://www.gov.gov.mu/ (accessed May 7, 2010).

Curd, R & O’Connell, E 2006, ‘United Kingdom: Auditors and Third Party Liability – Judicial Reassurance’, Mondaq, http://www.mondaq.com/ (accessed May 7, 2010).

Glusman, D & Ciociola, G D M 2006, Fiduciary Duties and Liabilities: Tax and Trust Accountant’s Guide, CCH.

Pacini, C & Sinason, D 1998, ‘Gaining a New Balance in Accountants’ Liability to NonClients for Negligence: Recent Developments and Emerging Trends’, Commercial Law Journal.

van Boom, W H, Koziol, H, Witting, C & Bloch, L 2004, Pure Economic Loss, Springer.

von Bar, C & Drobnig, U, Study on Property Law and Non-Contractual Liability Law as They Relate to Contract Law, http://ec.europa.eu/ (accessed May 7, 2010).

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