Opinion
Decided April 30, 1934.
Fraud — Public accountants — Reliance on accountant's balance sheet in purchase of stock — Accountant's certificate showing statements based on foreign statements respecting foreign companies — Indisputable inference that accountants had not examined books of foreign companies.
In action for damages for fraudulent misrepresentations of accountants, brought by one purchasing stocks and bonds, relying on such accountants' certified balance sheet, fraud is not established, where it is shown by the accountants' certificate that the statements "were based upon statements from abroad with respect to the foreign constituent companies." Such statement gives rise to the indisputable inference that the accountants had not examined the records of the foreign constituent companies.
ERROR: Court of Appeals for Cuyahoga county.
Mr. H.E. King, for plaintiff in error.
Messrs. Squire, Sanders Dempsey, for defendants in error.
This is a proceeding in error to reverse a judgment of the Court of Common Pleas wherein Martha R. Beardsley was plaintiff and Alwin C. Ernst and others were defendants.
The petition in substance alleged that the defendants were copartners doing business as Ernst Ernst, who were certified public accountants. It further alleged that the plaintiff in 1931 purchased at different times two bonds and twenty-one shares of preferred stock in the International Match Corporation. The petition set forth that the plaintiff acted upon her own initiative and relied upon the certification made by the expert accountants to the consolidated balance sheet and consolidated income and surplus account of the International Match Corporation for the year 1929 and for the year 1930.
It was further alleged by the plaintiff that the certificates made by the defendants were fraudulent, in that the defendants purported to have knowledge of the facts when in truth the defendants had no such knowledge; that the fraud was not discovered until after the suicide and death of Ivan Krueger, which occurred in Paris on March 12, 1932; and, further, that the bonds and stocks were at said time worthless and the International Match Corporation was bankrupt, although not so officially declared at the time of the purchases. By reason of these facts plaintiff claimed damages resulting from the alleged fraud in the sum of $2,339.99.
The defendants filed a joint answer, which, in substance, admitted the partnership; admitted the execution of the certificates; and also pleaded a general denial. A jury having been waived, the court below heard the evidence and rendered judgment for the defendants.
An examination of the record discloses that each certificate executed by the defendants was as follows:
"We hereby certify that we have examined the books of account and record of International Match Corporation and its American Subsidiary company at December 31, 1929, and have received statements from abroad with respect to the foreign constituent companies as of the same date. Based upon our examination and information submitted to us it is our opinion that the annexed Consolidated Balance Sheet sets forth the financial condition of the combined companies at the date stated, and that the related Consolidated Income and Surplus Account is correct.
Ernst Ernst."
On behalf of the plaintiff, proof was introduced that the International Match Corporation was adjudicated bankrupt by the United States District Court of the Southern District of New York on April 9, 1932. There were introduced by stipulation copies of an audit made by Price, Waterhouse Co., who were employed to audit the affairs of the International Match Corporation, and these audits had been filed with the referee in bankruptcy.
The audit made by Price, Waterhouse Co. revealed annual net earnings of the International Match Corporation for the years involved to be approximately $8,000,000, whereas the defendants had certified the net income for 1929 and 1930 respectively to have been in excess of $20,000,000.
The plaintiff relies largely upon the case of Ultramares Corporation v. Touche, 255 N.Y. 170, 174 N.E. 441, 74 A.L.R., 1139. In that case a certificate was made by Touche, Niven Co., who were public accountants, to the effect that they had examined the accounts of Fred Stern Co., Incorporated, and the certificate stated "that the annexed balance sheet is in accordance therewith and * * * the said statement, in our opinion, presents a true and correct view of the financial condition of Fred Stern Co., Inc., as at December 31, 1923."
The lower court, in the Touche case, held the accountants liable for negligence and not liable for fraud. Both sides appealed, and Judge Cardozo reversed both holdings and found that the accountants were not liable for negligence, but were liable for fraud. In that case, paragraph eight of the syllabus reads as follows:
"8. In action for damages for fraudulent misrepresentation of accountants, brought by person making advances relying on certified balance sheet, dismissal without submission to jury held error.
"The evidence indicated that, in certifying to the correspondence between balance sheet and accounts, the defendant accountants made a statement as true to their own knowledge when they had no knowledge on the subject."
If certified public accountants examine the books and records of a corporation and certify that the balance sheet reflects the true condition of the books and records examined, and there is a substantial variation between the balance sheet and such books and records, an action would no doubt lie against the accountants where the certification was made knowingly, or where there was a pretense of knowledge when in fact they had no knowledge.
In the instant case, however, the certificate made by Ernst Ernst clearly states that it is based both upon an examination of records and upon statements received from abroad with respect to the foreign constituent companies. The language used in these certificates gives rise to the indisputable inference that the accountants had not examined the books and records of the foreign constituent companies.
The record does not establish fraud or any false or fraudulent statements in relation to the examination actually made of the books and records in this country. We do not think that the defendants can be charged with fraud under these certificates by the very language used therein, when they in fact disclose that some of the information and statements came from abroad. It is obvious that the accountants in this case could not know whether or not the information from abroad was accurate or inaccurate, and, inasmuch as they disclose that these certificates were based partly upon information so received, there was no pretense of knowledge as to the information received which would make defendants liable.
Accordingly, the judgment of the Common Pleas Court is affirmed.
Judgment affirmed.
LIEGHLEY, P.J., and LEVINE, J., concur.