Auditors' Liability to Third Parties. Max Mitchell, a certified public accountant and president of Max Mitchell & Co, went to First Florida Bank, N.A., to negotiate a $500,000 unse-cured line of credit for C.M. Systems, Inc The audited financial

Question

statements that Mitchell gave the bank did not indicate that C.M. Systems owed any money. In fact, the company owned at least $750,000 to several banks. First Florida approved the loan, but C.M. systems never repaid it. The bank filed a suit in Florida state court against Mitchell and his firm, alleging negligence. Because there was no privity between Mitchell and the bank, the court granted Mitchell sum-mary judgment. The bank appealed. On what basis might the appellate court reverse?

Answer 1

Auditors' liability to third parties
The Supreme Court of Florida adopted the rule of Section 552 of the Restatement (Second) of Torts, "under which accountants may be held liable in negligence to persons who are not in contractual privity." Under this rule, "it is not necessary that [the negligent party] should have any particular person in mind as the intended, or even the probable, recipient of the information. * * * 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 from the much larger class who might reasonably be expected sooner or later to have access to the information and foreseeably to take some action in reliance upon it." In this case, "Mitchell actually negotiated the loan on behalf of his client. He personally delivered the financial statements to the bank with the knowledge that it would rely upon them in considering whether or not to make the loan." The court ruled that Mitchell could be held liable and remanded the case.