If you are an accountant in Utah, you know that you have a friend in the Utah statutes, specifically Utah Code section 58-26a-602 (the Accountant Liability Statute). Your protection is that you only owe fiduciary duties to your client and not to others. The Utah Court of Appeals recently reiterated the strength of this protection in Reperex, Inc. v. Child, Van Wagoner & Bradshaw. I will outline the case, the accountant’s protections, and what accountants need to watch out for and, for persons attempting to rely on the accountant, how they can make the accountant accountable to them. Here we go.
Repertex Inc. and the Transaction
This case is involves the sale of a business. Repertex, the buyer, in performing its due diligence, talked to seller’s accountant, Child (et al.), and agreed to hire seller’s business broker, Coldwell Banker, to represent both Repertex and seller in the transaction in a “dual agency capacity.”
During Child’s work as accountant, Child learned that the seller had commingled funds which made the seller’s business appear to have $374k in annual income when in fact it only had $74k. Child also knew that a prior potential buyer had backed out because seller’s largest customer was bankrupt. Child met with Repertex and provided seller’s business’ tax returns, accounting records, and other documents to Repertex but did not inform Repertex of the material facts regarding income and customers.
Utah Accountant Liability Statute
Utah has a favorable statute that protects accountants from claims of persons who are not their clients and with whom they do not have “privity of contract.” The Accountant Liability Statute states the general rule that licensed Utah accountants are not liable to those with whom they are not in privity of contract. Id. § 58-26a- 602.
The statute, § 58-26a- 602, also contains two exceptions, one for fraud and one for writings:
A licensee, a CPA firm registered under this chapter, and any employee, partner, member, officer, or shareholder of a licensee or CPA firm are not liable to persons with whom they are not in privity of contract for civil damages resulting from acts, omissions, decisions, or other conduct in connection with professional services performed by that person, except for:
(1) acts, omissions, decisions, or conduct that constitute fraud or intentional misrepresentations; or
(2) other acts, omissions, decisions, or conduct, if the person performing the professional services:
(a) knew that a primary intent of the client was for the professional services to benefit or influence the particular person seeking to establish liability; and
(b) identified in writing to the client that the professional services performed on behalf of the client were intended to be relied upon by the particular person seeking to establish liability.
Repertex admitted that it was not in “privity of contract” with Child. “Privity of contract” simply means that the parties had a contractual relationship. Child was admittedly not Repertex’s accountant. So, for Repertex to prevail against Child, it was required to establish an exception. Apparently the facts did not support the fraud exception because Repertex only asserted the writing exception. The trial court dismissed the claims against Child because Repertex failed to identify anything in writing that could meet the requirements of the statute. Utah Court of Appeals agreed. Even if the court would allow the circumstances to meet the first requirement, that Child was aware that Repertex was relying on his information, there was nothing in writing to meet the writing requirement.
The Court of Appeals also affirmed the dismissal of Repertex’s claim against Child for fraudulent misrepresentation. The key element for that claim is the finding of a duty or special relationship between Repertex and Child. There was none. Hence, there could be no liability under this claim.
The Take-Away for Accountants
Accountants, be very careful what you put in writing to anyone who is not your client. You do not want to give up your protection under the Utah Accounting Liability Act. You have a very strong shield that Utah courts have sustained many times. Do not squander it.
The Take-Away for Others
When you are dealing with an accountant who is not your accountant, be very careful. They do not owe you a duty. The extent of their obligation is to avoid “acts, omissions, decisions, or conduct that constitute fraud or intentional misrepresentations.” If you insist on relying on someone else’s accountant, get a specific statement in writing that meets the statute. It takes a very specific written statement to meet the exception. Get legal help if you have questions. Alternatively (and preferably), when you do your due diligence, get your own accountant or other professional to perform an evaluation that you can rely on. Be careful out there.
There are issues and nuances in defending claims, performing due diligence, and in pursuing transactions that are not addressed here. If you have legal questions, you should get specific legal advice. If you would like more information about anything you have read here or how to stay out of trouble, contact me, Utah attorney Ken Reich directly. I have represented both companies and individuals in numerous business matters, transactions, litigation, and disputes since 1999. Using my many years of experience and backed by a firm of legal specialists in nearly every legal field, I can help you evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.