Bily v. Arthur Young & Co.

Summary

The California Supreme Court considered the extent of an independent auditor's duty of care to persons other than the audit client. It held that an auditor owes no general duty of care to nonclients, but may be liable for negligent misrepresentation under Restatement Second of Torts section 552 to persons in an intended transaction, and for intentional fraud to reasonably foreseeable third parties.

Holdings

1. An auditor's liability for general negligence in conducting an audit of client financial statements is confined to the client who contracted for or engaged the audit. Merely foreseeable third-party users of the audit report may not recover on a pure professional-negligence theory.
2. A nonclient may recover for negligent misrepresentation in an audit report only if the auditor supplied the report for the benefit and guidance of the plaintiff or a limited, identifiable class, with respect to a specific transaction or type of transaction that the auditor intended to influence, and the plaintiff actually and justifiably relied on the report.
3. An auditor may be liable to reasonably foreseeable third parties for intentional fraudulent misrepresentations in an audit report when the auditor intends to defraud the plaintiff or a particular class of persons, or reasonably expects that class to rely on the misrepresentation.

Questions Presented

1. Whether an independent auditor owes a general professional-negligence duty to nonclient investors and other third parties who foreseeably rely on an audit report.
2. Whether nonclient third parties may recover against an auditor for negligent misrepresentation under Restatement (Second) of Torts section 552.
3. Whether an auditor may be liable to reasonably foreseeable third parties for intentional fraud in preparing and disseminating an audit report.
4. Whether the professional-negligence verdict could stand when the plaintiffs were not clients of the auditor.

Disposition

reversed_and_remanded