John Mutiso bought shares of Sh.2 million six months ago in Kenya Company Limited which has since gone into liquidation. He intends to sue XYZ & Co. Certified Public Accountants for the imminent loss of Sh. 2 million which he is likely to suffer. XYZ & Co. had audited the Kenya Company Ltd. The previous year and issued an unqualified report. John Mutiso claims that he solely relied on the audit report when he took that investment decision. Required: Do the auditors, XYZ & Co. have any liability to Mr. John Mutiso?

NO: A shareholder cannot sue the auditor individually if he relied solely on audited financial statements as a basis for investing in a company.
However the auditor could be liable if he knew that his report would be used to make
investment decision ‗Hedley Byrne principle‘

―Third parties entitled to recover damages under this principle are be limited to those who by reason of the accountants negligence in preparing reports, accounts or financial statements suffered financial loss and where the accountant knew or ought to have known that the report, accounts or financial statements in question were being reported for specific purpose or transactions which gave rise to the loss or that they will be shown to, and relied upon by third parties in that particular connection.
This position was supported by the decision In Re: Candler Vs Crank Christmas & Co(UK case)

Candler was induced to invest money in a company on the strength of audited financial statements and subsequently he lost his investment when the company wound up.
Lord Denning stated that, ― accountants owe their duty of course, to their employer or clients and also, I think to any 3rd person to whom they themselves show the accounts or to whom the know their employer is going to show the accounts so as to induce him to invest money or take some action on them. I do not think, however, the duty can be extended still
further so as to include strangers of whom they have heard nothing and to whom their
employer without their knowledge may choose to show the accounts‖

This judgment appears to imply that various users of audited financial statements such as creditors, potential investors e.t.c may not be able to sue the auditor for negligence by virtue of their placing reliance on audited financial statements.
Basing on this judicial precedence it appears that John Mutiso cannot successfully sue XYZ certified accountants.



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