Reversing and remanding 108 Wis.2d 771, 324 N.W.2d 296 (Ct. App.).
This is a review of an unpublished decision of the court of appeals which affirmed a judgment and order of the Circuit Court for Portage County, Honorable Fred A. Fink, Judge. The judgment granted the respondents', Timm, Schmidt & Company and General Casualty Company, (hereinafter Timm) motion for summary judgment dismissing Citizens State Bank (hereinafter Citizens) negligence cause of action
The issue considered on review is: May an accountant be held liable for the negligent preparation of an audit report to a third party not in privity who relies on the report?
We conclude that an accountant may be held liable to a third party not in privity for the negligent preparation of an audit report under the principles of Wisconsin negligence law. We also conclude that the information in the record raises a material issue of fact so that the summary judgment motion was improperly granted. We reverse the decision of the court of appeals and remand the case to the trial court for a trial on the negligence cause of action.
From the record, the following facts appear to be undisputed.
In November, 1975, CFA obtained a $300,000 loan from Citizens. The loan was guaranteed by the Small Business Administration, a federal agency (hereinafter SBA). Citizens made the loan to CFA after reviewing the financial statements which Timm had prepared. Additional loans, apparently not SBA guaranteed, were made by Citizens to CFA in 1976. By the end of 1976, CFA had a total outstanding indebtedness to Citizens of approximately $380,000.
In early 1977, during the course of preparing CFA's financial statement for 1976, Timm employees discovered that the 1974 and 1975 financial statements contained a number of material errors totalling over $400,000, once all period adjustments were made.
Once these errors were corrected and Citizens, as a creditor of CFA, was informed by Timm of the errors, Citizens called all of its loans due. As a result, CFA went into receivership and was ultimately liquidated and
Citizens filed an action against Timm and its malpractice insurance company on September 14, 1979, seeking to recover $152,214.44, the amount due on its loans to CFA.
Timm answered in October, 1979. On March 25, 1980, Timm filed a motion for summary judgment on the grounds that the pleadings and affidavits it submitted with its motion raised no issue of material fact and showed Timm was entitled to judgment as a matter of law. The affidavits submitted with the motion came from every member of the Timm firm who had worked on the CFA account. Each affidavit stated that the affiant had no knowledge, until after the fact, that CFA intended to or had obtained any loans from Citizens. The affidavit of Elmer Timm, president of the firm, also stated that he was never informed by any person that any audit report prepared by his firm for CFA would be used by any lender for the purpose of determining whether or not to make a loan to CFA.
Citizens submitted a number of affidavits in opposition to the motion for summary judgment. The affidavit of Den E. Hood, a certified public accountant, stated that he had examined the audit procedures used by Timm employees in preparing the 1974 and 1975 financial reports. Hood concluded after examining the procedures that the audit examinations had not been conducted in accordance with generally accepted auditing standards. He also concluded that had such standards been complied with, the material errors in the 1974 and 1975 statements should have been discovered and corrected prior to the issuance of each statement.
Citizens also submitted affidavits from its president, Gerald Beier, and a transcript of part of a deposition
Citizens also filed two affidavits from John Dando, CFA's president. The first was filed on October 8, 1980 and was considered by the trial judge in his original decision. That affidavit recited that Dando believed Timm was aware that statements its employees prepared would be submitted to SBA and that audited statements were a requirement of SBA loans.
Dando's second affidavit was not filed until October 28, 1980.
In that affidavit, Dando stated that Timm was "told that as soon as the third quarter  statement was finished, it would be personally picked up at [Timm's] office and taken directly to Citizens State Bank in order to expedite the loan application."
Based upon all of the affidavits except Dando's supplemental October 28, 1980 one, the trial court granted Timm's motion for summary judgment. The court concluded that under the Restatement of Torts (2d) section 552,
Citizens moved for reconsideration of this decision. The trial court denied this motion. In its decision on reconsideration, the trial court reviewed the Dando affidavit of October 28, 1980, but determined that it contained only "conclusionary facts" and thus was not sufficient to raise an issue of fact so that summary judgment would be inappropriate.
Citizens appealed. The court of appeals affirmed the trial court. It concluded that, even assuming that section 552 of the Restatement should be the law in this state, there was still no genuine issue of fact as to whether Citizens was within the class protected by its provisions. Therefore, the court of appeals concluded summary judgment was properly granted.
The question on review is whether accountants may be held liable for the negligent preparation of an audit report to a third party not in privity who relies on the report.
This is a question of first impression in this state. However, the issue has received wide consideration in both courts
According to Associate Justice Howard Wiener of the California Court of Appeals, Ultramares was relied on by every jurisdiction to consider this question to deny accountant liability to third parties.
In Rusch Factors, Inc. v. Levin, 284 F.Supp. 85 (D.C. RI 1968), the court, citing section 552 of the Restatement, imposed liability on an accountant to a relying third party not in privity. In Rusch Factors, the accountant knew the statements he prepared were to be used by his client for the purpose of obtaining credit from a third party even though they did not know of the specific relying third party. Nevertheless, the court allowed liability to be imposed. 284 F. Supp. at 93.
Similarly, in Ryan v. Kanne, 170 N.W.2d 395 (Iowa 1969), the Iowa Supreme Court applying Restatement section 552, determined that an accountant could be held liable to a foreseen third party who had relied upon
In this state, although the liability of accountants to third parties not in privity has not been examined, the liability of an attorney to one not in privity was recently examined in Auric v. Continental Casualty Co., 111 Wis.2d 507, 331 N.W.2d 325 (1983). This court concluded that an attorney may be held liable to a will beneficiary not in privity for the attorney's negligence in supervising the execution of a will. 111 Wis. 2d at 514. Part of the rationale for this decision
That rationale is applicable here. Unless liability is imposed, third parties who rely upon the accuracy of the financial statements will not be protected.
There are additional policy reasons to allow the imposition of liability. If relying third parties, such as creditors, are not allowed to recover, the cost of credit to the general public will increase because creditors will either have to absorb the costs of bad loans made in reliance on faulty information or hire independent accountants to verify the information received. Accountants may spread the risk through the use of liability insurance.
We conclude that the absence of privity alone should not bar negligence actions by relying third parties against accountants.
Although the absence of privity does not bar this action, the question remains as to the extent of an accountant's liability to injured third parties. Courts which have examined this question have generally relied upon section 552 of the Restatement to restrict the class of third persons who could sue accountants for their negligent acts. Under section 552(2) (a) and (b), liability is limited to loss suffered:
"(a) By the person or one of a limited group of persons for whose benefit and guidance he [in this case the accountant] intends to supply the information or knows the recipient intends to supply it; and
"(b) Through reliance upon it in a transaction that he [the accountant] intends the information to influence or knows the recipient so intends or in a substantially similar transaction."
Under section 552, liability is not extended to all parties whom the accountant might reasonably foresee as using the information.
"It is not required that the person who is to become the plaintiff be identified or known to the defendant as an individual when the information is supplied. It is enough that the maker of the representation intends it to reach and influence either a particular person or persons, known to him, or a group or class of persons, distinct
The fundamental principle of Wisconsin negligence law is that a tortfeasor is fully liable for all foreseeable consequences of his act except as those consequences are limited by policy factors. Osborne v. Montgomery, 203 Wis. 223, 234 N.W. 372 (1931); Pfeifer v. Standard Gateway Theater, Inc., 262 Wis. 229, 240, 55 N.W.2d 29 (1952); Schilling v. Stockel, 26 Wis.2d 525, 531, 133 N.W.2d 335 (1965); A.E. Investment Corp. v. Link Builders, Inc., 62 Wis.2d 479, 485, 214 N.W.2d 764 (1974). The Restatement's statement of limiting liability to certain third parties is too restrictive a statement of policy factors for this Court to adopt.
We conclude that accountants' liability to third parties should be determined under the accepted principles of Wisconsin negligence law. According to these principles, a finding of non-liability will be made only if there is a strong public policy requiring such a finding. Auric, 111 Wis. 2d at 512; A.E. Investment, 62 Wis. 2d at 485; Ollerman v. O'Rourke Co., 94 Wis.2d 17, 47, 288 N.W.2d 95 (1980). Liability will be imposed on these accountants for the foreseeable injuries resulting from their negligent acts unless, under the facts of this particular case, as a matter of policy to be decided by the court, recovery is denied on grounds of public policy. See, H. Rosenblum, Inc. v. Jack F. Adler, ___ N.J. ___, 461 A.2d 138 (1983).
"(1) The injury is too remote from the negligence; or (2) the injury is too wholly out of proportion to the culpability of the negligent tort-feasor; or (3) in retrospect it appeals too highly extraordinary that the negligence should have brought about the harm; or (4) because allowance of recovery would place too unreasonable a burden on the negligent tort-feasor; or (5) because allowance of recovery would be too likely to open the way for fraudulent claims; or (6) allowance of recovery would enter a field that has no sensible or just stopping point." Ollerman, 94 Wis. 2d at 48; Morgan v. Pennsylvania Gen'l. Ins. Co., 87 Wis.2d 723, 737, 275 N.W.2d 660 (1979); Stewart v. Wulf, 85 Wis.2d 461, 479, 271 N.W.2d 79 (1978); Coffey v. Milwaukee, 74 Wis.2d 526, 541, 274 N.W.2d 132 (1976).
Although in some cases this court has decided at the motion-to-dismiss stage that policy factors preclude the imposition of liability for negligent acts, Hass v. Chicago & North Western Railway Co., 48 Wis.2d 321, 327, 179 N.W.2d 885 (1970), it has generally been found to be better practice to have a full factual resolution before evaluating the public policy considerations involved. Ollerman, 94 Wis. 2d at 51; Morgan, 87 Wis. 2d at 738; Coffey, 74 Wis. 2d at 543; Padilla v. Bydalek, 56 Wis.2d 772, 780, 203 N.W.2d 15 (1973).
In this case we conclude that a determination of the public policy questions should be made after the facts of this case have been fully explored at trial. The question of the proper scope of these accountants' liabilities to the third party bank cannot be determined upon the information contained in the record. A full factual resolution is necessary before it can be said that public policy precludes Timm's liability for its allegedly negligent conduct.
Timm's affidavits do not dispute that Citizens' reliance upon the financial statements led to the making of the loans and ultimately to the losses which were incurred. Each affidavit recites that Timm employees had no knowledge that the financial statements would actually be used by CFA to apply for a new bank loan or to increase existing loan indebtedness. However, the affidavit of Elmer Timm stated that "as a certified public accountant, I know that audited statements are used for many purposes and that it is common for them to be supplied to lenders and creditors, and other persons."
These affidavits and other information contained in the record do not dispose of the issue of whether it was foreseeable that a negligently prepared financial statement could cause harm to Citizens.
Therefore, Timm having failed to establish a prima facie case for summary judgment, we conclude the trial judge erred in granting the motion for summary judgment.
By the Court. — Decision of the court of appeals is reversed and cause remanded to the trial court for further proceedings not inconsistent with this opinion.
"552. Information Negligently Supplied for the Guidance of Others.
"(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
"(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered
"(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
"(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction."