Negligent Misstatement-Third Party

Drisanda Finance v PF Audit Partners

An auditing firm, Peter Figman Audit Partners (PF Audit Partners), carried out an audit of the financial accounts of Goodfolk Pty Ltd (Goodfolk). The audit report produced by PF Audit Partners stated that the accounts of Goodfolk were a true and fair reflection of the company's financial status, and that the company was financially in a strong position.

In fact, the company was in serious financial difficulty at the time the report was prepared and written.

Drisanda Finance Corp. Ltd (Drisanda) did not hold any shares in Goodfolk. However, it provided a loan of $1 million to Goodfolk in reliance on the audit report produced by PF Audit Partners. The report was supplied to Drisanda by Goodfolk. Drisanda subsequently suffered substantial financial loss when Goodfolk went out of business and could not make the repayments owed under the loan.

Drisanda claims that it is reasonable for creditors and financiers to rely upon audited accounts when assessing whether to lend money to a company, and that this is common practice. PF Audit Partners were indeed aware that auditors' reports are often provided by corporations to prospective lenders, but they were not aware that this particular report might be provided to Drisanda byGoodfolk, and it was provided by Goodfolk without PF Audit Partners' knowledge.Drisanda wishes to initiate legal proceedings against the auditor, PF Audit Partners, for the tort of negligent misstatement.

Required:

Is Drisanda likely to succeed in an action under the tort of negligent misstatement against the auditor, PF Audit Partners?

IRAC FORMAT

Issues: Does the defendant owe a duty of care toward the plaintiff?

Rules ?

Application ?

Conclusion?