Auditor Liability to Third Parties in California

In Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, the court addressed auditor liability to third parties. It held, inter alia, that "an auditor may . . . be held liable for negligent misrepresentations in an audit report to those persons who act in reliance upon those misrepresentations in a transaction which the auditor intended to influence . . . ." (Id. at p. 376.) The Bily court expressed its approval of Restatement Second of Torts section 552, subdivision (b), having to do with the liability of suppliers of information. (Bily, supra, 3 Cal.4th at p. 408.) The court stated: "As the authors of section 552 observe, liability should be confined to cases in which the supplier 'manifests an intent to supply the information for the sort of use in which the plaintiff's loss occurs.' This follows because the 'risk of liability to which the supplier subjects himself by undertaking to give the information . . . is vitally affected by the number and character of the persons, and particularly the nature and extent of the proposed transaction.' The 'intent to benefit' language of the Restatement Second of Torts thus creates an objective standard that looks to the specific circumstances (e.g., supplier-client engagement and the supplier's communications with the third party) to ascertain whether a supplier has undertaken to inform and guide a third party with respect to an identified transaction or type of transaction. If such a specific undertaking has been made, liability is imposed on the supplier. If, on the other hand, the supplier 'merely knows of the ever-present possibility of repetition to anyone, and the possibility of action in reliance upon the information on the part of anyone to whom it may be repeated,' the supplier bears no legal responsibility. " (Bily, supra, 3 Cal.4th at pp. 409-410.)