Appeal from the Circuit Court of Du Page County; the Hon. Carl
F. Henninger, Judge, presiding.
JUSTICE NASH DELIVERED THE OPINION OF THE COURT:
Plaintiff, Robert L. Brumley, appeals from an order of the circuit court which dismissed his amended complaint against defendant, Touche Ross & Company (Touche Ross), in which damages were sought for the alleged professional negligence of Touche Ross in the preparation of certified financial statements for a third party, KPK Corporation (KPK). KPK is not a party to this action.
The central issue considered in this appeal is whether an accountant owes a duty to a third party for negligence in preparing an audit report for the accountant's client.
Plaintiff's amended complaint consisted of one count in which he alleged that Touche Ross is a partnership of certified public accountants which was engaged by KPK as independent auditors; that Touche Ross did audit the books and records of KPK and its subsidiaries and on October 29, 1976, issued an audit report to the board of directors and stockholders of KPK which contained a certificate stating, inter alia, that the report presented "fairly the financial position of KPK Corporation and subsidiaries at May 31, 1976 and 1975, and the results of their operations and charges in their financial position for the years then ended, in conformity with generally accepted accounting principles during the period * * *."
The complaint further alleged that Touche Ross knew and foresaw that its audit report would be circulated by KPK in carrying on its business, including its submission to potential investors in the company; that it was foreseeable to Touche Ross that KPK would submit the report to potential investors, such as plaintiff, who would rely upon the audit report and invest in the company on its strength; that Touche Ross had a duty to potential investors such as plaintiff to carry out the audit in accordance with generally accepted auditing standards and to issue a report which fairly presented KPK's financial position in accordance with its certificate.
The complaint alleged further that plaintiff negotiated with the stockholders of KPK in 1977 to acquire two-thirds of its issued stock and was furnished with a copy of the audit report; that he relied upon the report and was induced thereby to purchase stock of KPK for $5.7 million; that the audit report did not fairly present the financial condition of KPK (in specified ways) and Touche Ross breached its duty to plaintiff by negligently performing its audit of KPK in a manner which failed to meet generally accepted auditing standards (specified in the complaint).
Plaintiff's complaint concluded that the negligence of Touche Ross rendered the certified audit report as submitted to plaintiff a false statement of material fact, upon which plaintiff relied, proximately causing damages to plaintiff of $2,500,000.
Touche Ross moved to dismiss the complaint on the grounds plaintiff was collaterally estopped by a judgment of the circuit court of Kane County entered on July 2, 1982; that judgment was affirmed by this court in Howard A. Koop & Associates v. KPK Corp. (1983), 119 Ill. App.3d 391, 457 N.E.2d 66; Touche Ross was not a party to the litigation. In the alternative, Touche Ross sought dismissal on the grounds that plaintiff failed to join necessary parties to the litigation, viz., KPK and Howard A. Koop, the sole stockholder of KPK prior to plaintiff's purchase of KPK stock.
After arguments, the trial court dismissed the complaint, finding that plaintiff had failed to join necessary parties and was otherwise collaterally estopped by the Kane County judgment. The court also found, sua sponte, that the complaint failed to state sufficient facts which would give rise to a duty owed by Touche Ross to plaintiff. Plaintiff appeals contending that the trial court erred in all three findings.
For purposes of ruling on a motion to dismiss, all well-pleaded facts contained in a complaint must be taken as true and all inferences therefrom must be drawn in favor of the non-movant. (Palatine National Bank v. Charles W. Greengard Associates, Inc. (1983), 119 Ill. App.3d 376, 456 N.E.2d 635; Burks Drywall, Inc. v. Washington Bank & Trust Co. (1982), 110 Ill. App.3d 569, 442 N.E.2d 648.) A complaint should not be dismissed for failure to state a cause of action unless it clearly appears that no set of facts could be proven under the pleadings which would entitle plaintiff to relief. (Palatine National Bank v. Charles W. Greengard Associates, Inc. (1983), 119 Ill. App.3d 376, 456 N.E.2d 635.) Although Illinois requires fact rather than notice pleading (Ill. Rev. Stat. 1981, ch. 110, pars. 2-603(b), 2-612(c); Pelham v. Griesheimer (1982), 92 Ill.2d 13, 440 N.E.2d 96), a complaint will not be dismissed if facts essential to its claim appear by reasonable implication and it reasonably informs the defendants of a valid claim under a general class of cases. Magana v. Elie (1982), 108 Ill. App.3d 1028, 439 N.E.2d 1319; Central States, Southeast & Southwest Areas Pension Fund v. Gaylur Products, Inc. (1978), 66 Ill. App.3d 709, 384 N.E.2d 123.
We first address the issue of whether the complaint alleged facts which give rise to a duty owed by Touche Ross to plaintiff. Research by the parties and this court has revealed no Illinois cases which define the duty owed by a public accountant to a third party, not in privity, for damages proximately caused by an accountant's negligence in preparation of an audit report.
Plaintiff contends the accountant's duty extends to all foreseeable parties who may rely upon defendant's certified audit report to exercise due care in its preparation. Defendant argues that an accountant owes a duty only to those with whom he is in privity or, at most, to those other parties who the accountant knew would rely upon his work.
The rule as stated in Ultramares Corp. v. Touche (1931), 255 N.Y. 170, 174 N.E. 441, has often been applied in other jurisdictions. Justice Cardozo there wrote that a public accountant is not liable in negligence to third parties with whom he is not in privity as such a duty could result in liability to an unlimited class of foreseeable plaintiffs and public policy required a limitation of that duty. Justice Cardozo noted:
"If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath a cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the ...