Nycal Corp. v. KPMG Peat Marwick LLP.

426 Mass. 491, 688 N.E.2d 1368 (1998)

 

RULE:

The potential liability of an accountant to noncontractual third parties who can demonstrate actual knowledge on the part of accountants of the limited -- though unnamed -- group of potential third parties that will rely upon a report, as well as actual knowledge of the particular financial transaction that such information is designed to influence. The accountant's knowledge is to be measured at the moment the audit report is published, not by the foreseeable path of harm envisioned by litigants years following an unfortunate business decision.

FACTS:

In reliance on an auditors' report of the financial statements of a company issued by the accountants, the stock purchasers entered into a stock purchase agreement with the controlling shareholders of a company. The sale was completed, but two years later, the company filed for bankruptcy protection, rendering the stock purchasers' investment worthless. Plaintiff stock purchasers filed an action against the accountants for alleged material misrepresentations of the financial condition of a company in which the stock purchasers had a stock purchase agreement. The trial court granted summary judgment in favor of the accountants. The case was appealed.

ISSUE:

Are the accountants liable to the stock purchasers who relied on their report given that the former had no knowledge that their report would be used by that party?

ANSWER:

No

CONCLUSION:

The court affirmed the decision that dismissed the subsequent complaint against the accountants. The undisputed facts failed to show that they knew, or intended, that the stock purchasers, or any limited group of which they were a member, would rely on the audit report in connection with an investment in the company. At the time the audit was being prepared, the purchasers were an unknown, unidentified potential future investor in the company.

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