Messrs. Twomax Limited, Reginald A. S. Goode and John Robert Gordon raised actions for reparation on the ground of negligent misrepresentations against Messrs. Dickson M'Farlane and Robinson, a firm of chartered accountants. Twomax (UK 1983) demonstrate that audit firms may be liable to third parties in certain circumstances. It is a case also involving the decision to acquire shares, based on negligently audited financial statements. The auditors should be able to anticipate that third party will use the audited financial statement as a guideline in decision making process. Both cases had resulted in the growing number of third parties which have a legal right to sue auditor for negligence. In other word, auditor’s liability to third parties has increased. The defendants had all relied on the accounts in taking and calculating the price of shares in the knitwear company.
In the case of Twomax Ltd., £56,100; in the case of Goode, £7,500; and, in the case of Gordon, £1,500. Twomax Limited purchased 16,000 ordinary shares in Kintyre in November 1973 which shares were formerly held by a Mr Surmann, a director of Kintyre. That purchase was at £2·10 per share. In addition Twomax purchased a fresh issue of Kintyre shares, namely 15,000 at £1·50 per share. It is pleaded for all three pursuers that in making these purchases they relied upon balance sheets and accounts prepared and audited by the defenders. Twomax, they also plead that they relied upon advice given by Mr M'Farlane at meetings held prior to the conclusion of the agreement to purchase the 31,000 shares. It is said that the audited accounts prepared by the defenders for years prior to 1975 had been highly misleading and inaccurate. Mr M'Farlane, acted negligently and incompetently in the preparation and auditing of Kintyre's accounts. Instead of trading profitably the said Kintyre Knitwear Limited had in fact been trading at a loss both before and after the purchase of the said shares, figures which were...
Please join StudyMode to read the full document