Appeal from the Circuit Court of Cook County. 91 L 18515. Honorable Martin C. Ashman, Judge Presiding.
The Honorable Justice Cahill delivered the opinion of the court: Theis and S.m. O'brien, JJ., concur.
The opinion of the court was delivered by: Cahill
The Honorable Justice CAHILL delivered the opinion of the court:
We address the liability of an accountant, under the Public Accounting Act (225 ILCS 450/30.1 (1993)), for negligent misrepresentation to a third party with whom the accountant is not in privity. The trial court denied a motion for summary judgment (735 ILCS 5/2-1005 (West 1994)) by one defendant and a motion to dismiss (735 ILCS 5/2-615 (West 1994)) by the other based upon the court's reading of section 30.1 of the Act. The court framed the issue in the form of a question and certified it under Supreme Court Rule 308 (157 Ill. 2d R. 308). The question reads:
"Whether, under section 30.1 of the Illinois Public Accounting Act, *** an accountant may be liable for allegedly negligent misrepresentations to a third party with whom the accountant is not in privity where the accountant has not stated in writing that the third party was intended to rely on its representations or sent the third party a copy of such a writing."
We granted defendants leave to appeal and now affirm the trial court.
The plaintiff, Chestnut Corporation, invests in other businesses. The defendants are Pestine, Brinati, Gamer, Ltd., an accounting firm, and Robert Davidson, a certified public accountant.
Chestnut expressed an interest in investing in Alphatype Corporation in 1989. Chestnut reviewed Alphatype's financial statements for 1987 and 1988. Pestine prepared both statements, and Davidson reviewed the 1988 statement under an agreement he had with Pestine. Davidson also shared office space with Pestine.
Representatives of Chestnut visited the offices of Pestine and Davidson in 1989 to discuss Alphatype's financial statements. They told the defendants that Chestnut was contemplating an investment in Alphatype and were reviewing its financial condition. Chestnut's representatives asked whether the 1987 and 1988 financial statements were accurate. The defendants stated that the audit was accurately performed according to generally accepted auditing standards. Defendants also gave Chestnut work papers in support of the information in the 1988 statement.
Chestnut invested $1,300,000 in Alphatype, relying on defendants' representations. Alphatype soon lost large amounts of money and filed for bankruptcy.
Chestnut sued defendants for damages when it lost money on the investment in Alphatype. Chestnut alleged in its complaint that defendants made three negligent misrepresentations about Alphatype's financial condition: (1) the value of inventory was less than represented; (2) the value of accounts receivable was overstated; and (3) no accrual was made for vacation pay owed to Alphatype's employees and officers. Chestnut further alleged that defendants knew or should have known the representations were not true. Chestnut alleged that defendants made the representations intending that Chestnut rely on them. Chestnut also alleged that defendants breached a duty to Chestnut by not performing their work according to generally accepted auditing standards.
A thorough review of accountant liability at common law is set out in Brumley v. Touche, Ross & Co., 123 Ill. App. 3d 636, 463 N.E.2d 195, 79 Ill. Dec. 57 (1984), and further explored in a second decision involving the same parties, Brumley v. Touche, Ross & Co., 139 Ill. App. 3d 831, 487 N.E.2d 641, 93 Ill. Dec. 816 (1985) (Brumley II). For many years an accountant was liable in damages for his work only to his client. The often quoted rationale for this strict limitation on liability was written by Justice Cardozo in Ultramares v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931). He reasoned that to allow third parties to recover for an accountant's negligence "may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class." Ultramares, 255 N.Y. at 179-180, 174 N.E. 441.
When the court in Brumley was presented with the issue of an accountant's liability to a third party, it surveyed the history of the issue since Ultramares, then looked to two Illinois Supreme Court cases for guidance: Rozny v. Marnul, 43 Ill. 2d 54, 250 N.E.2d 656 (1969) and Pelham v. Griesheimer, 92 Ill. 2d 13, 440 N.E.2d 96, 64 Ill. Dec. 544 (1982). The court in Rozny recognized that a non-privity party could bring an action in Illinois against a surveyor for negligent misrepresentation. The Pelham court held that an attorney could owe a duty to a third party who was not his client if the attorney was acting at the direction of or on behalf of his client to benefit or influence the third party. Relying on these opinions, the Brumley court held that an accountant owed a duty to third parties who relied on his report or opinion if the accountant "was acting at the direction of or on behalf of his client to benefit or influence [the] third-party." Brumley, 123 Ill. App. 3d 636, 642, 463 N.E.2d 195, 200, 79 Ill. Dec. 57. The court in Brumley II then considered an amended complaint and clarified its previous holding by stating: "to be sufficient plaintiff's complaint must allege facts showing that the purpose and intent of the accountant-client relationship was to benefit or influence the third-party plaintiff." Brumley II, 139 Ill. App. 3d at 836, 487 N.E.2d 641.
Section 30.1 of the Illinois Public Accounting Act was enacted in 1986 and now controls the liability of accountants to third parties not in privity ...