Bily v. Arthur Young & Co. - 3 Cal. 4th 370, 11 Cal. Rptr. 2d 51, 834 P.2d 745 (1992)

Rule:

The determination whether in a specific case a defendant is liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction is intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.

Facts:

Plaintiffs, an individual investor, a corporate investor, and associated individuals, invested in a computer company that went bankrupt. Plaintiffs brought an action against defendant accounting firm, alleging intentional fraud and negligent misrepresentation. Plaintiffs contended that their investments were made in reliance on defendant's unqualified audit opinion on the company's financial statements. A jury found for plaintiffs on the professional negligence ground only. Defendants appealed, and the corporate investor cross-appealed on its misrepresentation claim, alleging that the trial court improperly instructed the jury. The appellate court, however, affirmed the trial court's judgment in favor of plaintiffs.

Issue:

On the basis of general negligence, could the accounting firm be held liable for the loss suffered by the investors? 

Answer:

No.

Conclusion:

The Supreme Court reversed and remanded the matter to the Court of Appeal with instructions to direct judgment in favor of defendant against the single plaintiff, and to decide a cross-appeal that had been filed by the remaining plaintiffs claiming that the defendant was an aider and abettor of the client's fraud. The court held that the trial court erred in entering judgment for plaintiff on the professional negligence count since an auditor can be held liable for general negligence in conducting an audit of financial statements only to the person or entity contracting for the auditor's services, and the accounting firm's sole client was the company. The court further held that although an auditor may not be held liable to third parties for general negligence, an auditor may be held liable for negligent misrepresentation to third parties who are known to the auditor and for whose benefit the auditor has rendered the audit report. The court further held that an auditor may also be held liable to third parties for intentional fraud in the preparation of an audit report, if the auditor had no belief in the truth of the false statements made in the audit report and made them recklessly, even though the auditor may not have had actual knowledge of the false or baseless character of its opinion.