Walter, a Chartered Accountant, Provided Services to ABC Manufacturing Inc

question 62

Essay

Walter, a chartered accountant, provided services to ABC Manufacturing Inc. owned by Mr. White. Walter took care of all of ABC's financing, bookkeeping, payroll management, financial statement preparation and tax planning and preparation. Early in January, White came to Walter to inform him that he was thinking of selling the business. He explained that the slow economy had considerably dampened his sales and that he wished to sell the business as a going concern before the situation became critical and he might be forced to sell at a loss or liquidate assets to satisfy creditors. Walter listened carefully but suggested that White should wait and sell after he prepared some current financial statements from which he could offer some constructive advice about the fortunes of the company. Walter also told White that, based on his understanding of the situation, ABC could easily be restored to financial health. Walter prepared draft statements using certain assumptions about the availability, terms and cost of bridge financing and the reduction in operating expenses that could be achieved by rearranging production in certain ways. The assumptions were not fully explained on the statements as Walter preferred to meet with White and discuss the matter fully. However, a footnote stated that "the figures are based on receipt of interim financing and predicted cost reductions." Walter then sent the statements to White for his review and invited further discussion.
Two weeks later, Walter received a telephone call from White who told him he had sold the business at a substantial profit to Black. The purchaser had been impressed with the financial position of the company based on Walter's most recent statements and had taken the statements to his bank in order to secure a loan for the purchase price. The loan was granted. Within the first six months under Black's ownership, ABC's sales continued to fall. Black's new accountant prepared financial statements that portrayed a much more dismal situation than had Walter's. Within another month, one of ABC's major suppliers forced the company into bankruptcy.
Discuss the liability of the parties in this case, if any, and render a decision.

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Definitions:

Cost Data

Information related to the financial expenditures required to produce goods or services.

Purely Competitive Market

An ideal market scenario where many sellers offer identical products, ensuring no single entity can significantly impact market prices or conditions, effectively echoing the principles of pure competition.

Cost Data

Information related to the expenses incurred in producing a product or providing a service, including materials, labor, and overhead.

Output Level

The quantity of goods or services produced by a business or economy within a certain period.