THE AUDITOR’S DUTY OF CARE TO THIRD PARTIES

Zelda Panzirer v Emanuel L Wolf et al

Perhaps the world's most extreme example of the extension of an auditor’s duty of care to include totally unknown (and unforeseeable), third parties occurred in the United States, in the case of Zelda Panzirer v Emanuel L Wolf et al (1987) 663 F 2d 365. The facts of this remarkable case were that Mrs Panzirer had purchased shares in United Artists, after reading a recommendation to that effect in the Wall Street Journal. Neither she, nor her broker, had seen the company's financial statements, or the audit report thereon. She subsequently alleged that the company's financial statements should have been subject to a 'going concern' audit qualification. The Court of Appeals upheld her right to sue the auditor, essentially on the basis of the efficient markets hypothesis. The ratio of this decision was that auditors make a contribution to the content and quality of publicly available financial information, and consequently that security prices reflect the work of auditors. It was held that if the auditors had issued a qualified audit report the stock would not have been touted in the Wall Street Journal, Mrs Panzirer would not have purchased, would not have lost money, and therefore that she could sue the auditor. It could well have been argued that Mrs Panzirer had a stronger (or at least more equitable), case against the Wall Street Journal, or against the company itself (for issuing misleading financial statements). It appears, however, that legal counsel presumably advised her that the auditor was the most 'sueable' party.  The Panzirer case is discussed here to illustrate the extreme consequences which can arise if no mechanism is imposed by the courts to limit the extent of a person's duty of care in relation to purely economic losses suffered by third parties. South African auditors may take comfort, however, because it is inconceivable that a South African court would uphold the existence of an auditor's duty of care to a potential investor, in similar circumstances.