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Solved: John P Butler Accountancy Corporation agreed to audit the finan


John P. Butler Accountancy Corporation agreed to audit the financial statements of Westside Mortgage, Inc., a mortgage company that arranged financing for real property, for the year ending December 31, 2006. On March 22, 2007, after completing the audit, Butler issued unqualified audited financial statements listing Westside’s corporate net worth as $175,036. The primary asset on the balance sheet was a $100,000 note receivable that had, in reality, been rendered worthless in August 2005 when the trust deed on real property securing the note was wiped out by a prior foreclosure of a superior deed of trust. The note constituted 57 percent of Westside’s net worth and was thus material to an accurate representation of Westside’s financial position. In October 2007, International Mortgage Company (IMC) approached Westside for the purpose of buying and selling loans on the secondary market. IMC signed an agreement with Westside in December after reviewing Westside’s audited financial statements. In June 2008, Westside issued a $475,293 promissory note to IMC, on which it ultimately defaulted. IMC brought an action against Westside, its owners, principals, and Butler. IMC alleged negligence and negligent misrepresentation against Butler in auditing and issuing without qualification the defective financial statements on which IMC relied in deciding to do business with Westside. Butler claimed that it owed no duty of care to IMC, a third party who was not specifically known to Butler as an intended recipient of the audited financial statements. Is Butler correct? Explain.


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