A negligent misrepresentation occurs when a person during the course of his/her business, profession or employment, gives false information for the guidance of others in their business transactions[i]. The person giving such false information will be liable for pecuniary loss caused to others by the justifiable reliance upon the information[ii]
A liability will extend to those persons with whom the accountant is in privity or near privity, and also to those persons whom the accountant knows and who will rely on the accountant’s opinion[iii].
To make an accountant liable to a third party for an audit performed by the accountant, the third party must prove that[iv]:
- The accountant had knowledge that the third party will rely on the information, or had knowledge that the client for whom the audit report was prepared intended to supply the information to a third party who will rely on such information;
- The third party justifiably relied upon the information in its decision concerning the transaction involved or one substantially similar to it.
Whereas, when an independent accountant prepares and audits the financial records of a corporation, then the accountant is liable for negligent misrepresentation to those third parties who reasonably and foreseeably relied on the financial records, the audit, or both[v].
It must also be noted that an auditor’s liability for negligent misrepresentation does not require proof of the audit that was intended to influence the particular plaintiff. A complaint for negligent misrepresentation is sufficient if it alleges the audit was intended to influence the particular class of persons to which plaintiff belongs[vi].
However, an action by a third party against an accountant for negligent misrepresentation must be based on representations of an existing fact. Mere expressions of opinion about a future fact or event, or representations of future performance cannot be made actionable as negligent misrepresentations.
[i] DeLuca v. Jordan, 57 Mass. App. Ct. 126 (Mass. App. Ct. 2003)
[ii] Wessa v. Watermark Paddlesports, Inc., 2006 U.S. Dist. LEXIS 32412 (W.D. Wash. May 22, 2006)
[iii] Marcus Bros. Textiles, Inc. v. Price Waterhouse, L.L.P., 350 N.C. 214 (N.C. 1999)
[iv] Prescott Group Aggressive Small Cap, L.P. v. Blackwell, 2003 U.S. Dist. LEXIS 27080 (N.D. Okla. Aug. 25, 2003)
[v] Nutmeg Sec. v. McGladrey & Pullen, 92 Cal. App. 4th 1435 (Cal. App. 2d Dist. 2001)