Massachusetts court rules firm owes no duty to investors.

A Massachusetts district court ruled that an auditor did not owe a duty to a third-party investor. KPMG Peat Marwick performed an audit of Gulf Resources and Chemical Corp.'s 1990 financial statements. Nycal Corp,, a subsequent investor in Gulf, maintained it had suffered damage as a result of its reliance on the firm's audit report. The accounting firm moved for summary judgment on the ground it owed no duty to Nycal.

In ruling for the firm, the court observed that its audit of Gulf's 1990 financial statements was not prepared for anything other than the ordinary purposes for which such audits are prepared. The audit specifically was not designed to assist Gulf in selling its shares to new investors. At the time the audit was completed, no particular investor or transaction was on the horizon. Nycal was not an entity or within any limited group of persons for whose benefit the firm rendered its audit report.

Although the firm was aware of discussions between Gulf and two other investors that had taken place before the Nycal transaction, Nycal's subsequent investment in Gulf stock bore no resemblance to either of those proposed transactions. The court found that under current law, there was no obligation of due care for some general category of possible future transactions, but only for the transaction envisioned by the accountant or another transaction that was essentially the same. (Nycal Corp. v. KPMG Peat Marwick, LLP Superior Court of Massachusetts, August 12, 1996)

Editor's note: Thanks to Paul Fife of Wild, Carey & Fife, San Francisco, for the Software Design case and to John Hughes of Hutchins, Wheeler & Dittmar for the Nycal case.

--Edited by Wayne Baliga, CPA, JD, CPCU, CFE, president of Aon Technical Insurance Services.