This motion focuses on the novel issue of whether an independent auditor should be held liable for defamation for failing to redact from an audited report an allegedly defamatory statement written by the corporation.
Plaintiffs, Frank J. Abella ("Abella") and Investment Partners of America, instituted this action primarily against Barringer Resources, Inc. ("the Company") and several of its officers and directors. Plaintiffs' complaint principally alleges that said defendants wrongfully terminated Abella's employment with the Company. Plaintiffs' complaint also includes a defamation claim against the accounting firm BDO Seidman ("Seidman") and its partner, Frank J. Pearlman ("Pearlman"). These defendants have moved pursuant to R. 4:46 for summary judgment on the defamation count in plaintiffs' complaint. For the reasons set forth below, defendants' motion is granted and the defamation count in plaintiffs' complaint is dismissed.
Pursuant to the Securities Exchange Act of 1934, the Company is required to file an audited annual report on Form 10-K
with the Securities and Exchange Commission ("SEC"). 15 U.S.C.A. § 78m; 17 C.F.R. s 249.30. Accordingly, the Company prepared its annual financial statement, which included the following footnote entitled "commitments and contingencies":
Effective July 18, 1990, Frank J. Abella, Jr., Managing Partner of Investment Partners of American ("IPA"), was terminated for cause by the Board of Directors of the Company as Vice Chairman and Chief Executive Officer of the Company. As a result, the management agreement between the Company and IPA was terminated. Mr. Abella and/or IPA may institute legal proceedings to recover the balance of the payments which would have been due under the agreement with IPA of approximately $180,000.00. The Company believes it has meritorious defenses to any claims against the Company made by Mr. Abella and/or IPA and intends to defend against any such claims and to assert counterclaims. [Emphasis added].
Thereafter, the Company hired defendants to audit its annual report. Seidman performed the audit, as described below, and attached its one page auditor's report to the Company's financial statement, which Barringer submitted to the SEC. Plaintiffs contend that they were defamed by the auditors because the auditors failed to redact the Company's written representation that Abella was "terminated for cause."
While these facts are simply stated, this motion is complex without an adequate understanding of the role and function of the independent auditor. Initially, it is important to note that the company prepares and is responsible for its financial report, not the auditor. The auditor's sole responsibility is to express an independent opinion on the fairness of the Company's report. AICPA Professional Standards Volume 1 ("AICPA"), Responsibilities and Functions of the Independent Auditor, AU § 110, at 61 (1992). In order to express an opinion on the fairness of the financial presentation, the auditor examines the report in accordance with Generally Accepted Auditing Standards ("GAAS"). Ibid. Under GAAS, an auditor must obtain reasonable assurance as to whether the financial statement taken as a whole is free of material misstatement. AICPA, Audit Risk and Materiality in Conducting an Audit, AU § 312, at 231-17 (1992). Some data upon which the auditor relies during this process is, as a practical matter, unverifiable. Rosenblum v.
Adler, 93 N.J. 324, 344, 461 A.2d 138 (1983) (citations omitted). The auditor is neither required to investigate every supporting document nor deemed to have the training or skills of a lawyer or criminal investigator. Ibid. Instead, in order to reasonably assure that the statement is not materially misstated, the auditor examines, on a test basis, samples of evidence that support the amounts and disclosures in the financial statement. AICPA, Audit Sampling, AU § 350, at 463 (1992). When this process is complete, the auditor opines whether the financial statement was prepared in accordance with generally accepted accounting principles and identifies those circumstances in which such principles were not consistently observed. AICPA, Responsibilities and Functions of the Independent Auditor, AU § 110, at 61. The auditor then memorializes this opinion in an "auditor's report," which is generally a one-page statement that is attached to the Company's financial statement. AICPA, Reports on Audited Financial Statements, AU § 508, at 651-54 (1992). At this point, the Company's annual report is deemed "audited" and the Company submits it on Form 10-K to the SEC.
The gravamen of this complaint concerns information disclosed in a footnote to the annual report. In order to conform to generally accepted accounting principles, the financial statement must, inter alia, adequately disclose material matters. AICPA, Adequacy of Disclosure in Financial Statements, AU § 431, at 521 (1992). If the Company refuses to disclose material information either in the body of the financial statement or its accompanying footnotes, the independent auditor is prohibited from expressing an unqualified opinion in her/his auditor's report. Ibid. For example, possible loss contingencies resulting from potential litigation must, in certain situations, be disclosed either as a charge against income or in a footnote. An estimated loss must be charged against income if:
a) information available prior to issuance of financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at ...