Citizens State Bank v. Timm, Schmidt & Company

Supreme Court of Wisconsin · 1983 · Torts

335 N.W.2d 361 (1983)

Updated July 23, 2026

TortsNegligenceAccountant malpracticeThird-party liabilityaccountant negligencethird-party relianceno privity requiredforeseeability

Facts

Timm, Schmidt & Company prepared CFA's financial statements for 1973 through 1976 and issued opinion letters for each year except 1973 stating that the statements fairly presented CFA's financial condition and were prepared according to generally accepted accounting principles. Citizens State Bank made loans to CFA after reviewing those statements, and by the end of 1976 CFA owed Citizens about $380,000. In early 1977, while preparing the 1976 statement, Timm discovered material errors in the 1974 and 1975 statements totaling over $400,000 after adjustments. After Citizens was informed of the errors, it called the loans due, CFA went into receivership and liquidation, and Citizens sued to recover the unpaid balance, alleging negligent preparation of the financial statements.

Issue

May an accountant be held liable for negligent preparation of an audit report to a third party who is not in privity but relies on the report? Also, did the record establish as a matter of law that the accountants were entitled to summary judgment on the bank's negligence claim?

Rule

Under Wisconsin negligence law, the absence of privity alone does not bar a negligence action by a third party against an accountant for negligent preparation of an audit report. Accountant liability to third parties is governed by ordinary Wisconsin negligence principles: liability may exist for reasonably foreseeable injuries caused by negligent acts unless, under the facts of the particular case, recovery is denied on public policy grounds. A court may deny liability on public policy grounds where, for example, the injury is too remote, disproportionate, highly extraordinary, unduly burdensome, conducive to fraudulent claims, or would create no sensible or just stopping point.

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

In Madison, Wisconsin, Lakeview Accounting Group negligently overstated the inventory of North Ridge Toolworks in audited financial statements. Oak Street Bank later extended credit after reviewing those statements, and the borrower defaulted. The accountants had no contract with Oak Street Bank and did not know the bank’s identity, but a partner admitted audited statements are commonly provided to lenders.

If Oak Street Bank sues the accounting firm for negligence, which is the strongest argument against dismissing the claim at the outset?

Explanation. Under the majority’s rule, an accountant may be liable in negligence to a third party not in privity. Wisconsin applies ordinary negligence principles: foreseeable injuries caused by negligent acts may be actionable unless public policy bars recovery. The court specifically rejected the idea that lack of privity alone defeats the claim.