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A company relied to its detriment on financial statements prepared by defendant. The company ultimately went bankrupt. Plaintiff, who was still owed money by the now dissolved company, sued defendant to collect on the amount owed.
Accountants may be held liable for to third parties who rely upon the accountant’s negligent preparation of financial reports.
For three years, the accounting firm of Timm, Schmidt & Company (“Timm”) (defendant) prepared financial statements for the company Clintonville Fire Apparatus, Incorporated (“CFA”). These statements presented the financial condition of CFA. Relying on Timm’s statements, CFA obtained $380,000 in loans from Citizens State Bank (“Citizens”) (plaintiff). Timm later discovered mistakes in all the statements prepared for CFA. The mistakes totaled over $400,000. CFA went bankrupt and still owed money to Citizens. Since they were unable to collect from CFA, Citizens sued Timm to recover the amount still owed.
Whether accountants may be held liable for the negligent preparation of an audit report to a third party not in privity who relies on the report?
Yes. Accountants may be held liable for to third parties who rely upon the accountant’s negligent preparation of financial reports. The record does no establish that Timm was entitled to summary judgment.
Unless liability is imposed, third parties may be harmed by their reliance on the accuracy of financial statements and the negligence of accountants preparing these statements will go undeterred. The absence of privity alone will not bar negligence actions against accountants by relying third parties. A finding of non-liability will only be made if it is justified by public policy. Grounds that would preclude liability include: a finding that an injury that is too remote from the negligence; that injury is out of proportion to the tortfeasor’s culpability, or that the allowance of recovery would open the door to fraudulent claims.