QUESTION 3 (ILAC Question)

Fritz and Nancy Williams are directors and owners of Show Glam Gear Pty Ltd (Show Glam). Show Glam carries on its business of manufacturing, selling and repairing horse and dog show equipment. Nixon Accountants Pty Ltd (Nixon's) prepared the financial statements for Show Glam for the 2022-2023 financial year which were lodged with the Australian Taxation Office. Unfortunately when preparing the financial statements Nixon's made a number of careless errors which resulted in Show Glam's trading income being significantly overstated. Fritz and Nancy want to sell the show equipment business and without Nixon's knowledge, they provide a potential buyer 'Julian' with the financial statements that were prepared. Julian was so impressed with the trading figures that he purchases Show Glam for $500,000.

Once purchased, Julian is very disappointed with the Show Glam business as the trading income has fallen substantially and is well below what the financial statements suggested that were supplied to him. Julian engages a business valuation expert to assess Show Glam and the expert advises that the business is only worth $200,000.

Does Nixon's owe a duty of care when preparing the financial statements for Show Glam? Explain your answer referring to appropriate law for negligent misstatement.