45 Misc. 2d 1054 | N.Y. Sup. Ct. | 1965
Plaintiff seeks to recover damages of approximately $140,000 allegedly sustained by it as the result of certified public accountants’ professional negligence in issuing a financial balance sheet which contained substantial errors in the listed inventory and surplus accounts.
Defendants, in effect, are charged with failure to perform properly their contract to audit plaintiff’s books and records, with breach of warranty and with negligence in the preparation and issuance of the subject financial statement.
The trial of this action was commenced before Justice Margaret Mary Mangan and a jury. During such trial, upon stipulation of counsel and consent of the court, the jury was
It appears that in or about March, 1955, plaintiff, by oral retainer, had employed defendants, a firm of certified public accountants, to perform usual and required audits of its books and records. Pursuant to such retainer, the credible evidence shows that defendants, by their employees, undertook to verify the accuracy of plaintiff’s ledger entries, to prepare interim financial reports, to audit the books of account and to verify the amount of plaintiff’s inventory, its most significant business asset. Accordingly, employees of defendants who attended plaintiff’s premises at least several days a month supervised those employees of plaintiff who made the original entries in its books and records.
The record establishes that plaintiff was engaged in the business of converting cotton and rayon greige goods. None of the goods so processed by plaintiff was kept in its own premises but was delivered to plaintiff’s customers directly from the converting mills, finishing plants, dye or embossing firms. A physical inventory of merchandise belonging to plaintiff could be obtained only during Summer months when these establishments ceased operations temporarily for a vacation period. Few, if any, such physical inventories were made by defendants. They relied, instead, primarily upon invoices and other statements furnished to plaintiff by these various firms, as well as plaintiff’s own books and records.
On August 7, 1957, defendants issued a balance sheet of the financial position of the corporate plaintiff as of April 30 of that year. This financial statement was prepared by one of defendants’ senior certified public accountants. The subject financial statement, significantly, appears on defendants’ letterhead and, unlike other statements prepared and issued by them, it failed to carry the usual disclaimer stamp to the effect that such statement was based upon unaudited figures in their client’s books and records. The complaint alleges that this balance sheet erroneously represented plaintiff’s surplus at $8,152.79 and an inventory of $196,646.23, whereas there was, in fact, a deficit of $53,540.87 and an inventory of only $134,952.57.
The credible evidence adduced before me clearly establishes that instead of operating at a profit as of April 30, 1957, as advised by defendants ’ financial statement in issue here, plaintiff, in fact, was operating at a net loss of at least $29,000 and possibly as much as almost $50,000. This is apparent from
It is plaintiff’s position here that had it been properly advised by defendants that it was operating at a loss, it would have terminated its business affairs and not suffered any further losses until discovery of its true financial condition a year or so later. Defendants, on the other hand, in addition to maintaining the position that there is no error in the April 30, 1957 balance sheet, an untenable contention clearly refuted by the credible evidence (supra), also claim an accountant has no liability, “ in cases of this kind ”, for an error in his judgment as to the exact valuation to be assigned to the merchandise his employer has on hand. Concededly, it is well-established law throughout this country that an accountant does not guarantee correct judgment, or even the best of professional judgment, but merely reasonable competence (see Gammel v. Ernst & Ernst, 245 Minn. 249; Maryland Gas. Co. v. Cook, 35 F. Supp. 160, 166; 54 ALR 2d 324 et seq.). It is to the credit of the accounting profession that there are relatively few reported cases charging the accountant with incompetent judgment, the three most frequently cited actions involving fraud, gross negligence and liability to third parties (State St. Trust Co. v. Ernst, 278 N. Y. 104; C. I. T. Fin. Corp. v. Glover, 224 F. 2d 44; O’Connor v. Ludlam, 92 F. 2d 50).
In the instant matter, however, the exercise of judgment is not in issue, defendants’ contention to the contrary notwithstanding, for in preparing the disputed financial statement, the accountant had no cause to rely upon judgment at all. The documentary proof clearly shows that all defendants’ did in the-preparation of the subject balance sheet was to make mathematical computations from plaintiff’s books and records, without the need for or the actual exercise of any independent judgment.
Proper auditing procedure, as is necessarily involved in the
At least since 1905, accountants, in this country, have been accepted as a “ skilled professional class * * * subject generally to the same rules of liability for negligence in the practice of their profession as are members of other skilled professions ” (Smith v. London Assur. Corp., 109 App. Div. 882-883; see, also, Ann. 54 ALR 2d 324; Rich, Legal Responsibilities and Rights of Public Accountants [1935]; Roady and Andersen, Professional Negligence, supra, p. 256 et seq.). The certified public accountant, by virtue of his attained position and his contract of employment, must exercise the care and competence reasonably expected of persons in his profession to ascertain the facts on which his financial report is made. While his retainer agreement may set forth only the duties to be performed, applicable law governs such performance and requires, in addition to reasonable care, adherence to accepted professional standards (supra). If he fails to perform in accordance therewith, the accountant then may be liable either for breach of his contract or, in tort, for failure to exercise due care (Ultramares Corp. v. Touche, 255 N. Y. 170; Duro Sportswear v. Cogen, 131 N. Y. S. 2d 20, affd. 285 App. Div. 867; see, also, State St. Trust Co. v. Ernst, supra; National Sur. Corp. v. Lybrand, 256 App. Div. 226, 235; Smith v. London Assur. Corp., supra; Maryland Cas. Co. v. Cooh, supra; 1 N. Y. Jur., Accountants, §§ 9,10).
In this respect, it is to be noted that the cited rule 2.03 of the American Institute of Certified Public Accountants also requires that a certified public accountant, when he associates his name with a financial statement, (1) express an unqualified opinion; or (2) disclaim an opinion; or (3) express a qualified opinion; or (4) when unaudited financial statements are presented on his stationery without comment, disclose prominently on each page of the financial statement the fact that they were not audited. Defendants’ failure to place any qualification notice on the subject balance sheet, therefore, clearly constituted a violation of the emphasized portion of the cited rule which, without any doubt, fixes the existing and accepted standards of their profession.
In view of these recognized standards, therefore, the balance sheet here involved, issued under defendants’ professional letterhead, must be deemed to be an unqualified and, in effect, an audited financial statement upon which plaintiff had the right to rely in order to determine and evaluate its financial condition as of April 30, 1957. It is clear that in order to relieve themselves of any liability for errors contained in this April 30, 1957 balance sheet, defendants could have and should have indicated on its face all items that were not independently verified. Having failed to do so, they must assume any attendant liability.
Thus, giving due consideration to all of the evidence before me, I find that in issuing the subject balance sheet, defendants failed to conduct the required audit and, in effect, improperly represented on their professional letterhead, that the figures taken by them from plaintiff’s books and records were verified and audited computations (Duro Sportswear v. Cogen, supra; State St. Trust Co. v. Ernst, supra; Ultramares v. Touche, supra).
In addition to this failure to conduct a proper audit or to qualify their statement accordingly, the proof also indicates that defendants arbitrarily set up at least two accounting adjust
With respect to plaintiff’s cause of action sounding in negligence, however, although the proof leaves no doubt as to the professional carelessness of defendants, and while a proper audit would have revealed plaintiff’s true financial condition, the record does not contain sufficient credible evidence to warrant the conclusion that defendants’ errors or the omission of the qualifying statement were the proximate cause of all the damage for which plaintiff seeks recovery here (see Craig v. Any on, 212 App. Div. 55, affd. 242 N. Y. 569). The proof adduced before me establishes that when discrepancies in their issued statement were later discovered by defendants, they then alerted plaintiff to these inaccuracies. Thereafter, plaintiff also continued to receive from defendants all the additional information concerning its inventory which an audited or unqualified balance sheeet would have contained. Moreover, there is proof which indicates that despite defendants’ recommendations and advice, plaintiff failed to hire additional or adequate clerical help to follow through on the inventory information supplied to it by defendants. Such recommendations, if accepted, would have eliminated or, undoubtedly, minimized any subsequent loss suffered by plaintiff. In my opinion, therefore, plaintiff’s claim that it remained in business, with the consequent damage, solely in reliance on the information set forth in the erroneous balance sheet is without merit and unsupported by the credible proof.
Upon the evidence before me, therefore, I find plaintiff is entitled to recover from defendants only (1) the accounting and auditing fees paid to defendants for the one year of services rendered by them immediately prior to the issuance of the erroneous balance sheet, to wit, $3,600 (12 months at $300 per
Accordingly, judgment is rendered in favor of plaintiff against defendants in the sum of $6,100, with interest from August 7, 1957, the date of the delivery of the subject balance sheet.
