SW Legal studies in Business

Investors Who Did Not Rely on Audit Statements May Not Sue for Damages
Description Appeals court upheld the dismissal of suit brought by investors of a bankrupt firm who sued the accounting firm that had audited the firm for several years and prepared financial statements for a public offering of securities. There was no reliance on the reports, so no basis for liability for negligence in the performance of accounting duties.
Topic Accountant's Liability
Key Words Securities; Misrepresentation; Reliance
C A S E   S U M M A R Y
Facts G&W Asset Management Corporation hired BDO, an accounting firm, to audit its financial statements for several years and then for an initial public offering of securities. The audits failed to uncover the true financial condition of G&W, which filed for bankruptcy soon after the securities offering. Investors in G&W sued BDO for negligently performing audits. The district court dismissed the suit. Investors appealed.
Decision Affirmed. Under Georgia law, persons who are not clients of an accounting firm, but who wish to sue the firm and any of its accountants for professional malpractice must bring the suit based on negligent misrepresentation. The investors failed to establish that they relied on any misrepresentations in BDO's audit opinions in making their investment decisions, even if BDO was negligent in its auditing. The investors did not rely on the audits and were not in privity with BDO. Similarly, the investors may not recover on the basis of presumed or "indirect" reliance on the audit reports. Investors must show that they actually rely on the information in the reports.

Citation White v. BDO Seidman, LLP, 249 Ga.App. 668 (Ct. App., Ga., 2001)

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