Question about third party liability

Assignment Help Business Management
Reference no: EM1377696

George Hanson was the president of JustPrinting or JP, a printing supply and press repair business. In 1997, Hanson stop working because of his failing health. At that time, he relinquished his ownership interest in the firm to his three children, giving each a one third interest, and passed control of the company to his son-in-law, Philip Katz. After his retirement, Philip, now CEO, retained Walter, Stern and Bailey (WS & B) as JP's accounting firm. WS & B's dual undertaking through its contract was to perform annual audits of JP's financial statements as well as prepare unaudited reports for the firm every six months. Under the engagement, it audited JP's annual year-end financial statements for 1999, 2000, 2001 and 2002.

Hanson also entered into several transactions with JP after his retirement. In 2000, he loaned the company $450,000 and then in 2002, he pledged $150,000 to JP. After a June, 2003 independent audit found that reported accounts receivable had been inflated by JP, the Bank of the East, JP's principal lender, called in its $2 million loan. As a result, JP was forced to cease operations, and the Bank took possession of the company's premises and liquidated most of its assets.

Hanson sued WS & B on a theory of negligent misrepresentation for the $600,000 in losses he suffered as a result of the accounting error that led to JP's collapse. According to Hanson, JP's overstatement of its accounts receivable was a result of a mathematical error that went undetected for years. The effect of the error was the overstating of assets by approximately 10 times. Hanson claimed that WS & B failed to obtain, as it should have, independent confirmation of the receivables from the debtors, separate and apart from the input of JP. WS & B maintained that Hanson's damages were the result of a embezzlement scheme perpetrated by Buck Henry, the company's bookkeeper. It pointed out that Henry served a two year sentence in the federal penitentiary for that scheme.

WS & B moved to have the case dismissed. It argued that Hanson could not establish that WS & B owed him a duty of care in the conduct of the audit. WS & B asserted that no duty ran to Hanson from its contract with JP for the performance and preparation of audits and reports. In support of its motion, WS & B submitted the affidavit of Tracy M. Patrick, which stated that WS & B was not asked to express an opinion on the advisability of Hanson lending money to JP. Furthermore, WS & B argued that Hanson was not, and could not show that he was a third party beneficiary to the contract between JP and WS & B.

In response, Hanson emphasized the contacts he had with WS & B. Hanson had several discussions with WS & B personnel regarding the audits and reports of WS & B prior to making the loans to JP. Sometime between November 1, 1999 and February 1, 2000, Phillip Katz, Patrick and Hanson met at WS & B's office to discuss the loans. During that meeting, Mr. Patrick presented a cash flow analysis and a projected profit and loss statement for JP's coming year. Hanson was also given a copy of the 1999 audit report. Based on these reports and information presented by WS & B, Hanson agreed to make the loans and commitments to JP.

JP also sued WS & B for its failure to uncover the accounting error and its failure to uncover the fraud by Henry. WS & B argued that JP was contributorily negligent by failing to oversee Henry and by failing to have sufficient internal controls in place. JP argued that neither contributory negligence nor comparative negligence should be a defense since JP's negligence did not interfere with WS & B's ability to perform the audit and uncover the truth. WS & B argued that the court should allow the modern defense of comparative negligence.

Analyze the issues presented in this case scenario. The relevant law is contained in Chapters 8 and 44. You will also want to review material that explains accountants' liability that is posted on Blackboard in the Articles section. My power points are also available for your review as well as an article on the contributory negligence defense (see the Articles section of the course site). In making your analysis, answer the following questions:

1. Explain how the third party liability or duty issue will be resolved under the three different tests that have been developed by the courts: the primary-benefit test, the foreseen class of users test, and the foreseeable users test.

2. Explain what the plaintiffs will have to establish to prove negligence on the part of WS & B. Will the undetected mathematical error be sufficient to establish a lack of due care? If the case goes to trial, what will be WS & B's strongest argument relating to the negligent misrepresentation claim?

3. Explain the likely outcome of the contributory negligence issue. Consider how the issue would be resolved under the traditional and modern approaches to the contributory negligence defense in auditor liability cases. See the above article for a discussion of those approaches.

Reference no: EM1377696

Questions Cloud

Find the maximum level of total production : Determine at what level of labor utilization is total production maximized and find the maximum level of total production that this company can attain per month?
Creating an appropriate rewards system : Suggest strategies for an company to create an appropriate pay mix that considers monetary and non-monetary rewards, benefits and special prizes.
Objectives of public housing issues and the hope vi program : Discuss and explain the objectives of policy, especially noting any that may seem to be conflicting. Estimate the require to balance competing interests and make tradeoffs.
Creation of performance standards : Discuss how can involving workers in the creation of Performance Standards improve their effectiveness?
Question about third party liability : George Hanson was the president of JustPrinting or JP, a printing supply and press repair business. In 1997, Hanson stop working because of his failing health.
Listen to help : In Ronald Adler and Neil Towne's text Looking Out, Looking In, the authors list many ways that we listen to help.
Implementing a training presentation for management : Create and implement a training presentation for management training track of a firm that is a growing business consulting company. I have to design new worker orientation presentations inclusive of our matrix structure.
Differences between consultant and surrogate manager : Determine the differences between consultant and surrogate manager and which is more effective in the long term and explain your answer?
Compute the upper and lower control limits : A medical facility does MRI's for sports injuries. Occasionally a test yields inconclusive results and must be repeated. Using the following sample data and n = 200, estimate the upper and lower control limits for fraction of retests using two sigma ..

Reviews

Write a Review

Business Management Questions & Answers

  Caselet on michael porter’s value chain management

The assignment in management is a two part assignment dealing 1.Theory of function of management. 2. Operations and Controlling.

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. Due to increase in the preference for light beer drinkers, Chris Prangel wants to introduce light beer version in Mountain Man. An analysis into the la..

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. An analysis into the launch of Mountain Man Light over the present Mountain Man Lager.

  Analysis of the case using the doing ethics technique

Analysis of the case using the Doing Ethics Technique (DET). Analysis of the ethical issue(s) from the perspective of an ICT professional, using the ACS Code of  Conduct and properly relating clauses from the ACS Code of Conduct to the ethical issue.

  Affiliations and partnerships

Affiliations and partnerships are frequently used to reach a larger local audience? Which options stand to avail for the Hotel manager and what problems do these pose.

  Innovation-friendly regulations

What influence (if any) can organizations exercise to encourage ‘innovation-friendly' regulations?

  Effect of regional and corporate cultural issues

Present your findings as a group powerpoint with an audio file. In addition individually write up your own conclusions as to the effects of regional cultural issues on the corporate organisational culture of this multinational company as it conducts ..

  Structure of business plan

This assignment shows a structure of business plan. The task is to write a business plane about a Diet Shop.

  Identify the purposes of different types of organisations

Identify the purposes of different types of organisations.

  Entrepreneur case study for analysis

Entrepreneur Case Study for Analysis. Analyze Robin Wolaner's suitability to be an entrepreneur

  Forecasting and business analysis

This problem requires you to apply your cross-sectional analysis skills to a real cross-sectional data set with the goal of answering a specific research question.

  Educational instructional leadership

Prepare a major handout on the key principles of instructional leadership

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd