On appeal from the Superior Court of New Jersey, Law Division, Bergen County.
Bischoff, King and Polow. The opinion of the court was delivered by Bischoff, P.J.A.D.
The issues presented by this appeal are whether an accountant who prepares an audit owes a duty of care to (1) a person with whom he has no privity and (2) a person who he has no reason to know would rely upon the audit at the time it was made.
Defendants, partners of Touche Ross & Co., a national accounting firm, performed annual financial audits for Giant, a public corporation. Giant was required to file audited financial statements as part of its annual report on Form 10K with the Securities and Exchange Commission. The audit for the fiscal year ending January 30, 1971 was issued by defendant on April 16, 1971. It is conceded that at that time neither Giant nor defendant had met or even heard of plaintiff.
Approximately seven months after the 1971 audit was issued, in November 1971, plaintiffs, the owner of two retail catalog showrooms, first met with officers of Giant to discuss a merger. Soon thereafter Armin Frankel, a partner of defendant, became involved in the merger discussions as part of his duties as the "engagement partner" for the Giant account. In February 1972 Frankel was present at a series of meetings between plaintiff and Giant, and it is asserted that at this time Frankel knew that plaintiffs were in possession of the 1971 audit and were relying heavily upon it in evaluating the proposed merger.
An agreement of merger was executed March 9, 1972, and pursuant to it the parties merged June 12, 1972. Plaintiff asserts that defendant knew in March and April 1972 that Giant was manipulating its assets and earnings in order to conceal enormous losses. A 1972 audit of Giant was withdrawn by defendant on May 22, 1972. However, the 1971 audit was never withdrawn. Before the 1973 audit commenced, the deception was uncovered. Giant filed a petition in bankruptcy in September of 1973.
The record does not disclose precisely when defendants first recognized the falsity of Giant's financial records. Plaintiffs filed an amended complaint in four counts alleging (1) fraud, (2) negligence, (3) gross negligence and (4) breach of warranty. Defendants filed an answer and among the defenses raised asserted lack of privity of contract between plaintiff and defendant. Defendants moved for a partial summary judgment dismissing the plaintiffs' negligence claim insofar as it was based upon the 1971 audit of Giant, contending that since there was no privity between plaintiffs and defendants at the time the 1971 audit was performed there was no duty owed plaintiffs by defendants. The trial judge, relying upon Ultramares Corp. v. Touche, Niven & Co. , 255 N.Y. 170, 174 N.E. 441 (Ct.App.1931), and Yuhas v. Mudge , 129 N.J. Super. 207 (App.Div.1974), ruled that since at the time the audit was performed in 1971 defendants were not aware of the existence of plaintiffs, nor were plaintiffs members of a limited class foreseeably known to the
accountant to be likely to rely on the audit at the time of its preparation, there was no legal duty owed by defendants to plaintiffs.
A partial summary judgment was therefore entered dismissing plaintiffs' negligence claim based on the 1971 audit of Giant. All other negligence and fraud claims were reserved for trial.
With leave granted plaintiffs appeal from that summary judgment.
Of those jurisdictions that have considered the issue it is the majority rule that an accountant owes no duty of care to a person with whom he is not in privity of contract, if that person's reliance on the accountant's representation in the preparation of financial statements could not have reasonably been foreseen by the accountant at the time those representations were made. Ultramares Corp. v. Touche, Niven & Co., supra , 255 N.Y. 170, 174 N.E. 441; 2 ...