Question

Bristol Steel Corporation (BSC) manufactures steel products. In 2019, the treasurer of BSC invested excess funds into a speculative stock with the intention of liquidating the stock at some time in the future when the funds were required. The amount is material. After two months, the stock incurred a significant loss and was sold shortly thereafter. The controller prepared a journal entry to record the transaction as a sale of old inventory so the company showed a lower profit on sales than usual, but no trading loss.

The auditor provided an unmodified opinion on the 2016 financial statements. In 2020, the shares of the company were purchased by a private equity firm. The private equity firm relied on the 2019 audited financial statements. The error was discovered after the audited financial statements were issued.

Required

Assume that the private equity form sued the auditors. Explain how the 4 elements of negligence would apply to this case. Provide for a conclusion as to whether the auditor would be sued for negligence.

Answer 1

Elements of a Negligence Case

In order for a plaintiff to win a lawsuit for negligence, they must prove all of the "elements." For instance, one of the elements is "damages," meaning the plaintiff must have suffered damages (injuries, loss, etc.) in order for the defendant to be held liable. So, even if you can prove that the defendant was negligent, you may not be successful in your negligence claim lawsuit if that negligence caused you no harm.

When deciding on a verdict in a negligence case, juries are instructed to compare the facts, testimony, and evidence in determining whether the following elements were satisfied:

1. Duty
2. Breach of Duty
3. Cause in Fact
4. Proximate Cause
5. Damages

These five elements of a negligence case are explained in greater detail below.

1. Duty

The outcome of some negligence cases depends on whether the defendant owed a duty to the plaintiff. A duty arises when the law recognizes a relationship between the defendant and the plaintiff requiring the defendant to act in a certain manner, often with a standard of care, toward the plaintiff. A judge, rather than a jury, ordinarily determines whether a defendant owed a duty of care to a plaintiff, and will usually find that a duty exists if a reasonable person would find that a duty exists under similar circumstances.

For example, if a defendant was loading bags of grain onto a truck and struck a child with one of the bags, the first question that must be resolved is whether the defendant owed a duty to the child. If the loading dock was near a public place, such a public sidewalk, and the child was merely passing by, then the court may be more likely to find that the defendant owed a duty to the child. On the other hand, if the child were trespassing on private property and the defendant didn't know that the child was present at the time of the accident, then the court would be less likely to find that the defendant owed a duty.

2. Breach of Duty

It's not enough for a person to prove that another person owed them or a duty. The injury lawyer must also prove that the negligent party breached his or duty to the other person. A defendant breaches such a duty by failing to exercise reasonable care in fulfilling the duty. Unlike the question of whether a duty exists, the issue of whether a defendant breached a duty of care is decided by a jury as a question of fact. Thus, in the example above, a jury would decide whether the defendant exercised reasonable care in handling the bags of grain near the child.

3. Cause in Fact

Under the traditional rules of legal duty in negligence cases, a plaintiff must prove that the defendant's actions were the actual cause of the plaintiff's injury. This is often referred to as "but-for" causation, meaning that, but for the defendant's actions, the plaintiff's injury would not have occurred. The child in the example above could prove this element by showing that but for the defendant's negligent act of tossing the grain, the child would not have suffered harm.

4. Proximate Cause

Proximate cause relates to the scope of a defendant's responsibility in a negligence case. A defendant in a negligence case is only responsible for those harms that the defendant could have foreseen through his or her actions. If a defendant has caused damages that are outside of the scope of the risks that the defendant could have foreseen, then the plaintiff cannot prove that the defendant's actions were the proximate cause of the plaintiff's damages.

In the example described above, the child would prove proximate cause by showing that the defendant could have foreseen the harm that would have resulted from the bag striking the child. On the contrary, if the harm is something more remote to the defendant's act, then the plaintiff will be less likely to prove this element. Assume that when the child is struck with the bag of grain, the child's bicycle on which he was riding is damaged.

Three days later, the child and his father drive to a shop to have the bicycle fixed. On their way to the shop, the father and son are struck by another car. Although the harm to the child and the damage to the bicycle may be within the scope of the harm that the defendant risked by his actions, the defendant probably could not have foreseen that the father and son would be injured on their way to having the bicycle repaired three days later. Hence, the father and son wouldn't be able to satisfy the element of proximate causation.

5. Damages

A plaintiff in a negligence case must prove a legally recognized harm, usually in the form of physical injury to a person or to property, like a car in a car accident. It's not enough that the defendant failed to exercise reasonable care. The failure to exercise reasonable care must result in actual damages to a person to whom the defendant owed a duty of care and a personal injury claim must be brought to court within the appropriate time frame.