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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability

Harlow & Co audited the financial statements of Brent Ltd. Brent's bank, Norvale Bank, read the audited statements and lent Brent a large sum. Brent later failed and Norvale sued Harlow for negligence. Harlow had no contact with Norvale and did not know the statements would be used for lending decisions. Under the general common law approach to duty of care for negligent misstatement, what is the most likely outcome?

Harlow is unlikely to owe Norvale a duty of care. Under the general common law approach, an auditor owes a duty to a third party only if it knew the statements would be given to that party for a known purpose and reliance was foreseeable. Mere foreseeability of use is not enough.

  1. AHarlow owes Norvale a duty because any reader of audited statements is foreseeably affected
  2. BHarlow is unlikely to owe Norvale a duty because it did not know of the specific purpose or recipient of the statementsCorrect
  3. CHarlow owes Norvale a duty because the bank is a major creditor of the client
  4. DHarlow owes a duty only if the audit report was unmodified

Explanation

Following the Caparo line of cases, a duty of care to a third party generally requires that the auditor knew the statements would be communicated for a specific purpose and that the third party would rely on them. Harlow had no such knowledge. Option A applies a wide foreseeability test that the courts rejected as imposing unlimited liability.

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