Summary
The Supreme Court of Oklahoma considered claims arising from allegedly negligent audits performed by Arthur Andersen & Co. for Stroud Crop, Inc. and related entities. The court held that a professional accountant may rely on a client's negligence as a defense to professional negligence only when the client's conduct interfered with the professional services, while causation and damages remain separate issues for the jury. The court affirmed the judgment awarding compensatory and punitive damages, held that Steve Stroud was a proper plaintiff based on foreseeable reliance, and upheld denial of prejudgment interest.
Topics
Practice areas
Questions Presented
- Whether a professional accountant may invoke a client's comparative negligence to defend against professional negligence when the client's conduct did not interfere with the accountant's performance of professional services.
- Whether competent evidence supported the jury's findings that Andersen breached its professional duty, caused the plaintiffs' injuries, and caused the amount of compensatory damages awarded.
- Whether Steve Stroud was a proper plaintiff and a foreseeable, known relier entitled to pursue damages based on Andersen's audited financial statements.
- Whether Stroud and Stroud Crop, Inc. were entitled to prejudgment interest under 12 O.S. Supp. 1997 § 727(E) for economic losses to business assets.
Holdings
- An accountant may not use a client's negligence to excuse the accountant's deficient professional performance unless the client's conduct interfered with the accountant's provision of professional services. The defendant may still argue that the plaintiff's conduct caused or contributed to the damages or broke the chain of causation.
- Competent evidence supported the jury's findings that Andersen breached its professional duty, directly caused injury, and caused the compensatory and punitive damages awarded.
- Steve Stroud was a proper plaintiff and fell within the limited class of persons to whom Andersen owed a duty under the rule governing negligent provision of information for business transactions.
- Economic losses from injury to business assets are not personal injuries or injuries to personal rights within 12 O.S. Supp. 1997 § 727(E), so Stroud and Stroud Crop, Inc. were not entitled to prejudgment interest.
Key quotations
“An accountant cannot defend his/her deficient professional conduct by asserting that its client was also negligent unless the client's conduct can be proven to have interfered with the accountant's provision of professional services.” (789-790)
“One who, in the course of his . . . profession. . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.. . .” (794)
“An economic loss emanating from a business venture does not qualify as a personal injury under § 727(E)'s provisions and, hence, does not meet the statutory requirement for an award of prejudgment interest.” (795)
Factual background
Arthur Andersen audited the financial statements of Stroud Crop, Inc. and the Insurance Company of the Prairie States over several years. The audits allegedly failed to detect an understatement exceeding three million dollars in liabilities owed to the Federal Crop Insurance Corporation and failed to identify material weaknesses in internal accounting systems. Stroud and the companies alleged that they relied on the flawed audits in making business decisions that contributed to substantial economic losses; Stroud also relied on the statements while personally cross-collateralizing the companies' indebtedness.
Procedural history
The jury found for the plaintiffs after an eleven-day trial and awarded compensatory and punitive damages. The Court of Civil Appeals held that the audit-interference instruction was fundamental-law error and remanded for a new trial. On certiorari, the Oklahoma Supreme Court vacated the Court of Civil Appeals' opinion, affirmed the district court judgment, and sustained the denial of prejudgment interest.