DeLollis v. Friedberg, Smith & Co.
Accountants who are hired to audit a company that invests in a third party that is publicly traded and that has a readily ascertained market value may not be required, as a result of Generally Accepted Auditing Standards, to audit the third party and to verify the existence of publicly traded securities. Trustees of employee benefit plans invested assets in a fund, Beacon Associates, which allegedly invested about 73 percent of its assets in Bernard Madoff-related investment vehicles. Allegedly, Bernard Madoff was engaged in a Ponzi scheme. The plaintiffs sued Friedberg, Smith & Co., an accounting firm, and claimed it negligently audited Beacon's financial statements. Allegedly, Friedberg, Smith & Co.'s reports did not disclose concerns about the value of Beacon's assets with Madoff or indicate the value of investments could be inaccurate. The plaintiffs alleged that if Friedberg had conducted proper audits, or even expressed uncertainty about whether Beacon's financial statements were accurate, the plaintiffs would have withdrawn and liquidated the investments. The defendant moved to dismiss. The District Court applied New York law. An auditor can be held responsible for damages to a nonclient, as a result of reliance on negligently prepared audits, if a sufficient relationship exists. Allegations that Friedberg knew the audits would be used for the purpose of making investments in Beacon were sufficient to allege privity. The plaintiffs failed to allege a duty of care, to verify the accuracy, existence or value of Madoff's assets. Friedberg was not hired to audit Madoff. Generally Accepted Auditing Standards did not require the defendant to audit Madoff and to verify the existence of assets. Investments with Madoff were publicly traded securities, and the court found that "the auditor may rely on third-party confirmation of their existence." The court rejected claims that the auditor was required to audit a third party to confirm the existence of publicly traded securities. "To hold an auditor liable to a non-client for failure to sufficiently verify assets of another non-contractual party," wrote the court, "would impose an almost universal duty and unlimited potential liability on auditors." The court granted the motion to dismiss.