The standard of care applicable to the conduct of audits by public accountants is the same as that applied to doctors, lawyers, architects, engineers, and others furnishing skilled services for compensation, and that standard requires reasonable care and competence therein.[i]   In Ryan v. Kanne, 170 N.W.2d 395 (Iowa 1969), the Iowa Supreme Court held that accountants must perform their obligation that they have agreed to do under a contract and that they claim have been done in order to make the determination set forth and presented in their report.  The liability of accountants must be dependent upon their undertaking, not their rejection of dependability.  They cannot escape liability for negligence by a general statement that they disclaim its reliability.

In Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370 [11 Cal. Rptr. 2d 51, 834 P.2d 745] (Bily), Supreme Court formulated a hierarchy of duty for accountants who prepare inaccurate financial statements.

For ordinary negligence, an auditor owes a duty only to his or her client.  An auditor’s liability for general negligence in the conduct of an audit of its client financial statements is confined to the client, i.e., the person who contracts for or engages the audit services.  Other persons may not recover on a pure negligence theory.

For negligent misrepresentation, the duty expands to specifically intended beneficiaries of the report who are substantially likely to receive the misinformation.  The Supreme Court defined such beneficiaries as persons who, although not clients, may reasonably come to receive and rely on an audit report and whose existence constitutes a risk of audit reporting that may fairly be imposed on the auditor.  Such persons are specifically intended beneficiaries of the audit report who are known to the auditor and for whose benefit it renders the audit report.  An auditor is liable toward such beneficiaries when the representation was made with the intent to induce plaintiff, or a particular class of persons to which plaintiff belongs, to act in reliance upon the representation in a specific transaction, or a specific type of transaction, that defendant intended to influence.

For intentional misrepresentation, auditors owe duty to anyone whom s/he should have reasonably foreseen would rely on the misrepresentations.  Auditor must make representation with the intent to defraud plaintiff, or a particular class of persons to which plaintiff belongs, whom defendant intended or reasonably should have foreseen would rely upon the representation.  One who makes a representation with 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 thereby.

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] John Martin Co. v. Morse/Diesel, Inc., 819 S.W.2d 428 (Tenn. 1991)