Opinion ID: 199543
Heading Depth: 2
Heading Rank: 1

Heading: The Watershed Case.

Text: 15 Nycal v. KPMG Peat Marwick LLP is the SJC's most comprehensive effort to plot the borders of an accountant's liability to third parties for negligent misrepresentations. In that case, the plaintiffs - purchasers of stock - alleged that they had relied to their determent on financial statements prepared for the acquired company by the defendant (a well-known accounting firm). Nycal, 688 N.E.2d at 1369. After studying the available options, 2 the SJC adopted the Restatement rule anent the scope of an accountant's liability to a third party for negligent misrepresentations. Id. at 1370-71 (citing with approval Restatement (Second) of Torts §§ 552 (1977)). The SJC's description of the rule follows: 16 Section 552 describes the tort of negligent misrepresentation committed in the process of supplying information for the guidance of others as follows: (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. 17 That liability is [(2)] limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. 18 Id. at 1371-72 (internal quotation marks omitted). 19 The SJC recognized that section 552 was not self-elucidating, and that courts had been erratic in interpreting and applying it. Id. at 1372. This lack of uniformity seemed most readily apparent in respect to the level of knowledge - actual or constructive - required on the part of the putative defendant. The SJC opted to demand actual knowledge. Id. In so doing, it interpreted section 552 as limiting the potential liability of an accountant to non-contractual third parties who can demonstrate actual knowledge on the part of accountants of the limited - though unnamed - group of potential third parties that will rely upon the [accountant's work product], as well as actual knowledge of the particular financial transaction that such information is designed to influence. Id. (citations and internal quotation marks omitted). The accountant's actual knowledge, the court added, should be ascertained at the time the audit report or financial statement is issued. Id. at 1372-73. 20 Despite this emphasis on actual knowledge, the SJC added a caveat. It cautioned that accountants could not avoid liability by burying their heads in the sand: the Restatement standard will not excuse an accountant's 'willful ignorance.' Id. at 1373. 21