Summary
In McNerland, the faulty financial statements contained specific disclaimers which should have put the plaintiff on notice that the statements had not been audited by an independent CPA.
Summary of this case from North American Co. for Life Health v. BergerOpinion
47873.
ARGUED MARCH 5, 1973.
DECIDED JUNE 15, 1973. REHEARING DENIED JULY 13, 1973.
Action for damages, etc. DeKalb State Court. Before Judge Smith.
Skinner, Wilson, Beals Strickland, John V. Skinner, Paul J. Wagner, Jr., for appellants.
Long, Weinberg, Ansley Wheeler, Ben L. Weinberg, Jr., J. Kenneth Moorman, for appellees.
1. An accountant is not liable for negligence in the preparation and issuance of an uncertified financial statement, containing an express disclaimer of opinion, to third parties, not in privity, even though their reliance on such statement is known or could be anticipated.
2. An accountant may be liable to such third parties if he agrees to verify certain figures contained in a statement and negligently fails to do so.
ARGUED MARCH 5, 1973 — DECIDED JUNE 15, 1973 — REHEARING DENIED JULY 13, 1973 — CERT. APPLIED FOR.
Glenn P. MacNerland, Thomas M. Dolan, Jr., Kenneth L. Kemp and Nancy G. Dolan brought suit in the State Court of DeKalb County against James Alva Barnes d/b/a Barnes Company. Following the filing of a motion to add a party defendant and an order allowing the addition of a new defendant, the plaintiffs filed an amended complaint naming Barnes and Hugh Overbey as defendants. The complaint as amended alleged that the plaintiffs entered into agreement with defendant Overbey whereby he agreed to sell and they agreed to buy 45,090 shares of common stock of Continental Rent-A-Car of Georgia, Inc. d/b/a Airways Rent-A-Car; that as a part of the stock purchase agreement, the defendant Overbey represented and warranted to the plaintiff that the financial statement, books and records of the corporation were complete and correct and fairly represented the financial condition of the corporation, that the records had been prepared and kept in accordance with generally accepted accounting principles, and that there were no liabilities which were not reflected in the financial statement or notes thereto. The complaint further alleged that based on the information furnished them in the financial statement which was prepared by Barnes, the plaintiffs entered into the stock purchase agreement and incurred certain specified obligations and liabilities which were fully set out in the complaint.
It was alleged that the financial statement was prepared by Barnes at the request of the defendant Overbey and the plaintiffs; that they were aware of a disclaimer of opinion by Barnes but that both Barnes and Overbey knew that the plaintiffs were relying on the accuracy of the financial statement in determining whether they should enter into the stock purchase agreement; that the financial statement was incorrect by a total of some $45,000; that the defendant Overbey knew that the accounts receivable were not accurately stated and that certain ones were not collectible in the amount set forth; that the defendant Barnes was negligent in preparing the financial statement when he knew of or should have known of the discrepancies in the accounts receivable; that when the discrepancies were brought to defendant Barnes' attention, he admitted the same resulted from negligence of himself or his employees; that as a result of the plaintiffs' injurious reliance on the negligently prepared financial statement by the defendant Barnes and the defendant Overbey's representation and warranties as to the financial condition of the corporation, the plaintiffs have acquired a company which is worthless and unmarketable. The prayers of the complaint sought recovery of actual damages based on the negligence of the defendant Barnes and the misrepresentation and breach of warranties by the defendant Overbey, and punitive damages.
After filing of responsive pleadings and various depositions, the defendant Barnes filed a motion for summary judgment. The defendant Overbey filed a motion to dismiss based on jurisdictional grounds. After a hearing on the motion for summary judgment and the filing of additional papers and briefs in support and opposition thereto, the trial court entered an order granting and sustaining the defendant Barnes' motion for summary judgment. This order is the subject of the instant appeal.
1. The appellants have brought a motion to retax a portion of the cost of the record on appeal to the appellee. In Smith v. Top Dollar Stores, 129 Ga. App. 60, we held that a motion of this nature is properly brought in the trial court. See Code Ann. § 6-805 (f) (Ga. L. 1965, pp. 18, 24).
2. As stated in the brief of the plaintiffs, the basic question presented by the instant appeal is whether an accountant, as a matter of law, is liable for negligence in the preparation and issuance of an uncertified financial statement to parties not in privity but whose reliance is known to or foreseen by the accountant.
The plaintiff purchased stock in the company allegedly in reliance on a financial statement prepared by the defendant who was the accountant for the company. The statement which the accountant prepared was unaudited and contained a "disclaimer of opinion."
The general rule is that in the absence of intentional misrepresentation or fraud, an accountant is not liable for negligence to a third party who is not in privity with the accountant. See Ultramares Corp. v. Touche, 255 N.Y. 170 ( 174 NE 441, 74 ALR 1139); Landell v. Lybrand, 264 Pa. 406 ( 107 A 783, 8 ALR 461).
The defendant, an accounting firm, introduced statements on auditing procedures by the American Institute of Certified Public Accountants, through its Committee on Auditing Procedures. It showed that the form used by the defendant auditing firm was identical with that recommended in the "statement on auditing procedures," for report by a certified public accountant who is not independent. The statement is designed as a red flag that the accountant in question was not independent with respect to the company on which the financial report was prepared and the statements given were not audited by the accountant. As set forth in No. 38 of the Statement on Auditing Procedures "although the certified public accountant may have prepared, or assisted in preparing, unaudited financial statements, the statements are representations of management, and the fairness of their representation is management's responsibility." In the situation in which we are considering the accounting firm acts as a mere conduit through which the information passes and does not assume any responsibility for the correctness of the statements which are management's responsibility.
The disclaimer contained the following language: "Disclaimer of Opinion. We are not independent with respect to Airway's Rent-A-Car of Atlanta, and the accompanying balance sheet as of March 31, 1970 and the related statement of income and accumulated deficit for the three months then ended were not audited by us; accordingly, we do not express an opinion on them. Barnes and Company. April 27, 1970."
The Ultramares case seems to comport with Georgia law. In situations involving the liability of attorneys, the necessity for the attorney-client relationship to be present has been recognized. Smith v. International Lawyers, 35 Ga. App. 158 ( 132 S.E. 245); Endicott v. Grogan, 86 Ga. App. 149, 151 ( 70 S.E.2d 879). See Could v. Palmer Read, 96 Ga. 798 ( 22 S.E. 583). It is true of course that the cases refer to the money-rule procedure under Code § 9-617. However, the theme of these holdings is clear in that recovery for negligence requires privity between the parties involved. See generally Code § 4-203 catchword "attorney."
Ultramares has been under attack by various text writers and periodicals. It has also been criticized in certain cases cited by the appellant. Ryan v. Kanne (Iowa, 1969) 170 N.W.2d 395; Rusch Factors v. Levin (DC RI, 1968) 284 F. Supp. 85; Rhode Island Hospital Trust Nat. Bank v. Swartz, Bresenoff, Yavner Jacobs (CA 4 Va., 1972) 455 F.2d 847; Shatterproof Glass Corp. v. James (Tex.Civ.App., 1971) 466 S.W.2d 873 (46 ALR3d 968).
We have, nevertheless, found no persuasive authority upholding liability where there was both lack of privity and an uncertified statement or more particularly an express disclaimer. Ultramares stands as the majority rule and we see no reason to depart from its rationale.
Support for this view is found, inter alia, in two fairly recent decisions. The Tenth Circuit (Stephens Industries v. Haskins Sells, 438 F.2d 357), in applying Colorado law has held that a public accountant may be liable for damages to his client resulting from either fraud or negligence but as to third parties, even those who the accountant knew or should have known were relying on his audit, liability can be found and only upon fraudulent conduct, and proof of mere negligence will not suffice. The Florida Court of Appeals has held that even though there was a certified statement made that the accountant was not liable for mere negligence to third parties with whom there was no privity of contract. Investment Corp. of Fla. v. Buchman, 208 So.2d 291.
Where as here there is a written disclaimer, the accountant would not be liable to third parties for mere negligence in the preparation of a financial statement.
Fraud in this case was neither pleaded nor proved. It is contended by the plaintiffs that there is an inference of fraud from the dealings. Section 9 of the Civil Practice Act (Code Ann. § 81A-109 (b); Ga. L. 1966, pp. 609, 620) requires that the circumstances constituting fraud or mistake shall be stated with particularity. In view of this provision and under circumstances of this case, we do not think the defendant was required to negate a so-called inference of fraud. In this case there was evidence tending to show that the defendant made a "honest blunder" (see Ultramares Corp. v. Touche, 255 N.Y. 170, supra), but this is no ground for recovery on the part of the plaintiffs against the defendant. One of the plaintiffs was a certified public accountant and they were all aware that the defendant was not independent as to the defendant Overbey.
There is here no compelling reason to dispense with privity or to discard the plain purport of a written disclaimer. However, the case is on summary judgment and the burden was upon the movant to establish as a matter of law that there was no basis for the plaintiffs to recover against the defendant. There was evidence tending to show an agreement on the part of the defendant to verify certain major accounts to the plaintiffs. The accounts in question concerned the fleet of automobiles and the accounts payable. This arrangement as described was between the plaintiffs and the defendant, that in supplying the figures in the statement he would check to insure the accuracy of the described accounts. The defendant would have had to show that there was no agreement to verify any accounts or that there was no basis for the plaintiffs to rely on figures furnished with regard to such accounts. Therefore, the case must be reversed for a jury's consideration as to this issue alone.
Judgment reversed. Bell, C. J., and Deen, J., concur.