In 1983, to obtain financing prior to a public offering, Osborne Corporation sold warrants entitling investors to buy Osborne shares at a favorable price. The investors were given and relied on an unqualified audit opinion regarding Osborne’s 1982 financial statements, which indicated that Osborne had a net operating profit of $69,000 on sales of $68 million. The audit opinion, issued by Arthur Young & Company, stated that the audit had been completed in compliance with GAAS, that the financial statements had been prepared in compliance with FGAPP, and that the financial statements fairly presented Osborne’s financial position. Arthur Young could foresee that the audited financial statements might be used by buyers of Osborne’s warrants, but Arthur Young did not know that buyers of warrants would in fact use the financial statements. The buyers of the warrants lost their investments when Osborne’s manufacturing problems and IBM’s dominance in the PC market forced Osborne into bankruptcy. The investors sued Arthur Young on the grounds of negligent misrepresentation, because Osborne actually had a $3 million operating loss in 1982, a fact that Arthur Young negligently failed to discover. Using the three different tests for determining when a professional is liable to third parties, are the warrant investors permitted to sue Arthur Young for negligent misrepresentation?
In 1983, to obtain financing prior to a public offering, Osborne Corporation sold warrants entitling investors to buy Osborne shares at a favorable price. The investors were given and relied on an unqualified audit opinion regarding Osborne’s 1982 financial statements, which indicated that Osborne had a net operating profit of $69,000 on sales of $68 million. The audit opinion, issued by Arthur Young & Company, stated that the audit had been completed in compliance with GAAS, that the financial statements had been prepared in compliance with FGAPP, and that the financial
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