A corporation is preparing a brochure to send to a list of potential investors. The corporation hires Accountant X to prepare a report of the corporation’s assets. The corporation also hires Accountant Y to prepare a report of the corporation’s tax liabilities.
Both Accountant X and Accountant Y know that the corporation intends to share the reports with potential investors. Neither Accountant X nor Accountant Y knows the identities of the potential investors, nor does either accountant know how many potential investors there are.
Accountant X’s report shows that the corporation has net assets of $20,000,000. Accountant Y’s report shows that the corporation can expect to pay zero federal income tax for the current tax year, because the corporation is entitled to a large tax credit for research and development. The asset figure, as well as the prospect of zero tax liability, would indicate to a reasonable investor that the corporation is in good financial health. These factors also indicate that the corporation is a sound investment.
The corporation includes both accountants’ reports as part of the brochure. The corporation then sends copies of the brochure to 64 prospective investors. After reviewing and relying on all of the information in the brochure, including the accountants’ reports, an investor invests $2,000,000 in the corporation.
A few months later, the corporation files for bankruptcy, and the investor loses the entire $2,000,000 investment. It turns out that both Accountant X and Accountant Y were negligent in preparing their reports. Accountant X greatly overreported the corporation’s assets due to some errors in data entry. Accountant Y incorrectly interpreted the relevant tax credit, which, in fact, was not available to the corporation. Each of these errors disguised a serious financial problem, and either problem would have been sufficient to cause the bankruptcy. The investor would not have invested if she had known the truth about either problem.
The investor files suit, naming both Accountant X and Accountant Y as defendants. The investor alleges that the negligence of both accountants was responsible for the investor’s financial loss. The relevant jurisdiction has a statute that applies to providers of financial information, including accountants:
Negligently Providing Information: A person who negligently provides financial information is liable for any financial losses caused by such negligence. The provider shall be liable to persons not in privity with the provider only if the provider knows that the primary recipient intends to use the information to influence a limited group of such persons for a particular purpose.
The accountants seek to dismiss the case, arguing that they cannot be held liable because they supplied the information to the corporation, and thus were not in privity with the investor.
- Are the accountants potentially liable to the investor, despite the lack of privity? Explain.
- Assuming that the accountants are potentially liable, can the investor prove that either accountant’s report was a cause in fact of the investor’s loss? Explain.