Liability to Third Party

An accountant’s liability for ordinary negligence in the conduct of an audit of its client’s financial statements is confined to the client.  An accountant is liable for damages to his or her client for fraud and negligence, but s/he is liable to third parties, who the accountant knew or should have known were relying on audit, only for fraudulent conduct, and proof of mere negligence is not sufficient.[i]  In Marcus Bros. Textiles, Inc. v. Price Waterhouse, L.L.P., 350 N.C. 214 (N.C. 1999), the  Supreme Court of North Carolina held that in order for an auditor to be held liable to a third party, that party must demonstrate: (1) the accountant either (a) knew that the third party would rely on his or her information, or (b) knew that the client for whom the audit report was prepared intended to supply the information to a third party who would rely on that information; and (2) the third party justifiably relied upon the information in its decision concerning the transaction involved or one substantially similar to it.  Moreover, auditors owe duty to anyone whom s/he should have reasonably foreseen would rely on the misrepresentations.

Thus in cases of ordinary negligence, the accountant have no duty to third parties; in negligent misrepresentation matters, accountants have duty to third parties who would be known with substantial certainty to rely on the misrepresentation; and in cases of intentional misrepresentation, the accountants owe duty to third parties who could be reasonably foreseen to rely on the misrepresentation.

[i] In Stephens Industries, Inc. v. Haskins & Sells, 438 F.2d 357 (10th Cir. Colo. 1971),