Bily v. Arthur Young & Company

Supreme Court of California · 1992 · Torts

834 P.2d 745 (1992)

Updated July 23, 2026

Tortsaccountant liabilitynegligent misrepresentationprofessional negligencefraudauditor liabilitynonclient liabilityRestatement section 552

Facts

Osborne Computer retained Arthur Young to audit its 1981 and 1982 financial statements, and Arthur Young issued unqualified opinions stating the statements were examined under GAAS, prepared under GAAP, and fairly presented the company's financial position. Arthur Young delivered 100 printed sets of its 1982 opinion to the company, and with one exception the investor plaintiffs testified they relied on that audit opinion in making warrant and stock investments. Plaintiffs' expert testified Arthur Young committed numerous serious audit deficiencies, understated liabilities by about $3 million, and failed to disclose material weaknesses in internal accounting controls. After Osborne's business deteriorated and it filed for bankruptcy, plaintiffs lost their investments and sued Arthur Young.

Issue

Does an independent auditor owe a general duty of care in negligence to third persons who are not the client but who foreseeably receive and rely on the audit report? If not, under what circumstances may such third persons recover from the auditor for misstatements in the audit report?

Rule

An auditor's liability for general negligence in conducting an audit of client financial statements is confined to the client. A nonclient may recover for negligent misrepresentation only if the auditor intended to supply the information for the benefit of that person or a limited class of persons, and intended to influence a specific transaction or a specific type of transaction in which the plaintiff relied, consistent with Restatement Second of Torts section 552. An auditor may also be liable to reasonably foreseeable third persons for intentional fraud in preparing and disseminating an audit report.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Summit Valley Foods hired Pine Street Assurance LLP in Portland, Oregon, to perform its annual audit. After reading the clean audit opinion, Lena Ortiz, a supplier in Boise, extended trade credit to Summit Valley and was not paid when the company later failed. She sues Pine Street for negligent auditing, alleging it was foreseeable that vendors would rely on the report.

Is Lena most likely to prevail on a pure professional negligence claim against Pine Street?

Explanation. The majority held that an auditor owes no general duty of care in negligence to nonclients. Foreseeable reliance alone is insufficient. A nonclient may not recover on a pure negligence theory simply because vendors, lenders, or investors might foreseeably use the report.