Liability of CPA in Misstatement of Company's Assets & Bank Loan

A company engaged a CPA to perform an audit of the company's financial statements for Year 2 in order to apply for a bank loan. After the bank made the loan, it was discovered that the company's assets had been materially overstated. The overstatement was not discovered as part of the CPA's audit procedures. If the company defaulted on the loan and the case occurred in a jurisdiction that follows the Restatement rule, then the CPA could have liability to which of the following? The bank, butnotthe company. The company, butnotthe bank. Both the bank and the company. This answer iscorrect. An accountant may be liable for losses caused by the accountant's negligence. Ordinary negligence may result from an accountant's act or failure to act given a duty to act, for example, failing to observe inventory or confirm receivables. Thus, an accountant has a duty to exercise reasonable care and diligence. Accountants may be liable for failure to communicate to the client findings or circumstances that indicate misstatements in the accounting records or fraud. The client (the company) must prove that (1) the accountant owed the plaintiff a duty, (2) the accountant breached this duty, (3) the breach actually and proximately caused harm to the plaintiff, and (4) the plaintiff incurred damages. Furthermore, the accountant may be liable to third parties (e.g., the bank). The majority rule is that the accountant is liable to foreseen (not necessarily identified in the contract) third parties (foreseen users and users within a foreseen class of users). Foreseen third parties are those to whom the accountant intends to supply the information or knows the client intends to supply the information. The accountant knew that the client intended to use the audited statements and audit report to apply for a bank loan. The actual lender therefore is a member of a foreseen class of users. NOTE: Restatements are authoritative statements of state common law (e.g., on torts, contracts, and agency) published by the American Law Institute. They are not law but are very influential. Neither the bank nor the company.