Intentional Misrepresentation, Fraud, and Gross Negligence

A person during the course of his/her business, profession or employment, or in any other transaction in which s/he has a pecuniary interest gives false information for the guidance of others, is subjected to liability for pecuniary loss caused to them[i].

A person who makes a representation with the intent to defraud the public or a particular class of persons is deemed to have intended to defraud every individual in that category who is actually misled by such activity[ii].  An auditor who falsely certifies the annual report of a company stating that the company is free from material misstatement commits fraud[iii].

The elements of fraudulent misrepresentation are[iv]

  • A representation that is false and pertains to a past or present fact;
  • A representation that is material and susceptible of knowledge;
  • Representer had prior knowledge that the facts were false, or asserted as his/her own knowledge without knowing whether it was true or false;
  • The person acted in reliance upon the representation and suffered damage;
  • The representation was the proximate cause of the damage.

If an accountant is aware that the balance sheet prepared by him/her will be used by certain party, then the lack of privity is not a valid defense to a claim for damages due to the accountant’s negligence.[v].

Even an independent auditor is subjected to liability for representations made with the intent to defraud an individual or a particular class of persons to which the individual belongs[vi].

Generally gross negligence can be regarded as equivalent to fraudulent conduct which represents a limited relaxation of the strict standards required when a claim is asserted for intentional fraudulent conduct[vii].

[i] DeLuca v. Jordan, 57 Mass. App. Ct. 126, 137 (Mass. App. Ct. 2003)

[ii] Reisman v. KPMG Peat Marwick LLP, 57 Mass. App. Ct. 100 (Mass. App. Ct. 2003)

[iii] Imprimis Investors, LLC v. KPMG Peat Marwick LLP, 19 Mass. L. Rep. 51 (Mass. Super. Ct. 2005)

[iv] Nance v. Evje, 2007 Minn. App. Unpub. LEXIS 908 (Minn. Ct. App. 2007)

[v] Bethlehem Steel Corp. v. Ernst & Whinney, 822 S.W.2d 592 (Tenn. 1991)

[vi] Nutmeg Sec. v. McGladrey & Pullen, 92 Cal. App. 4th 1435 (Cal. App. 2d Dist. 2001)

[vii] Ingram Industries, Inc. v. Nowicki, 527 F. Supp. 683 (E.D. Ky. 1981)