Robert Wooler Co. v. Fidelity Bank

Decision Date04 September 1984
Citation330 Pa.Super. 523,479 A.2d 1027
PartiesROBERT WOOLER COMPANY v. The FIDELITY BANK, Wayne Raichle and Donna E. Raichle and Touche Ross & Co. Appeal of The FIDELITY BANK.
CourtPennsylvania Superior Court

Michael G. Trachtman, Norristown, for appellant.

Steven T. Stern, Philadelphia, for Wooler, appellee.

Michael L. Temin, Philadelphia, for Touche, appellee.

Before WIEAND, MONTEMURO and HOFFMAN, JJ.

WIEAND, Judge:

This appeal requires that we review the nature and extent of the duty owed by an accounting firm to the company which retained it to perform unaudited services. It also requires that we review the circumstances under which interest may be added to a tort verdict based on negligence.

Robert Wooler Company (Wooler), a corporation, filed suit against The Fidelity Bank (the Bank) to recover a loss sustained when Wooler's bookkeeper, Donna Raichle, diverted 94 Wooler checks into a personal account maintained by Raichle and her husband at the Bank. The complaint alleged that the Bank had accepted checks for deposit which contained forged corporate endorsements and, therefore, was liable for conversion under 13 Pa.C.S. § 3419. The complaint also contained averments that the Bank had failed to exercise reasonable care and had failed to handle the forged instruments in accordance with reasonable commercial standards. The Bank joined Raichle as an additional defendant. It also joined Touche Ross & Co. (Touche Ross), the accounting firm employed by Wooler, alleging that the accountant had enabled the Wooler loss to go undetected by negligently performing accounting services which it had been contractually obligated to perform. Touche Ross filed preliminary objections alleging improper joinder. These objections were dismissed, and, after extensive discovery, the case came on for trial without jury.

Following trial, the court made findings of fact. It found that the Bank had converted the checks and had been guilty of negligence when it accepted checks payable to the corporation and credited the proceeds to Raichle's personal account. 1 The court found that Wooler had also been negligent but that its contributory negligence had not been a substantial factor in bringing about its loss. On appeal, the Bank has not challenged the court's findings regarding its liability. It does challenge the manner in which the court disposed of the negligence of Touche Ross. 2 With respect to the accountant's liability, the trial court made the following findings.

24. Additional defendant Touche Ross and Co. is not liable for contribution to Fidelity or jointly liable or solely liable to Robert Wooler Company.

25. Additional Defendant Touce [sic] Ross and Co. is not liable as stated above on the theories set forth in Judge Takiff's Opinion. Yardis v. First Pa. Bank N.A. and David H.L. Aron & Cogan, Sklar and Company, [20 D. & C.3d 679 (1980) ].

26. Additional Defendant is not liable in accordance with current legal theories as set forth above even though it failed to use reasonable care in being alert, and therefore, failed to make the necessary inquiries in accordance with reasonable professional standards so as to discover what was readily discoverable to it in order to protect plaintiff.

27. Professionals such as Touche Ross & Co. cannot be like the three monkeys 'hear no evil, see no evil, speak no evil' in order to avoid liability to the plaintiff if liability were otherwise attachable. (emphasis added).

Judge Takiff's decision in Yardis v. First Pa. Bank, et al., supra, upon which the trial court relied, had been decided on procedural grounds. It had there been held that in an action by a payee against a bank to recover losses sustained when the bank accepted forged checks for deposit, the payee's accountant could not be joined as an additional defendant. In the instant case, however, another judge of the Montgomery County Court of Common Pleas held prior to trial that the joinder of Touche Ross as an additional defendant had been proper and denied a preliminary objection asking that such joinder be stricken. Trial was thereafter completed with Touche Ross, the additional defendant, as a party and active participant.

Exceptions filed by the Bank to the court's adjudication were dismissed by a court en banc without opinion. After the Bank had appealed, the trial judge prepared a "Supplemental Opinion" in which he confirmed the prior basis for his refusal to impose liability upon Touche Ross but added his further conclusion that Touche Ross "had no duty to inquire into plaintiff's system of internal control."

The evidence adduced at trial discloses that accounting services may be audited or unaudited, depending upon the terms of the agreement between the accountant and the client. The principal difference between the two is the degree and amount of responsibility undertaken by the accountant. In both types of engagements the accountant agrees to prepare financial statements. In an audited engagement, the accountant assumes responsibility for the accuracy of the figures appearing thereon. In effect, he warrants the reliability of the report which he prepares. In an unaudited engagement, the accountant does not warrant and is not responsible for the ultimate accuracy of the report if the figures supplied by the client are erroneous.

Touche Ross was employed by Wooler in an unaudited engagement. The accounting firm contends that in such an engagement, an accountant has no duty to discern defects in the client's system of internal controls. This is the first issue we must resolve. Does an accountant so engaged have a duty to examine the means or procedures set up by the client to protect the assets of the business entity? If the accountant knows or has reason to know that the client's system of internal control contains defects which impair the client's financial security, what is the accountant's responsibility to correct them or call them to the attention of the client?

In O'Neill v. Atlas Automobile Finance Corp., 139 Pa.Super. 346, 11 A.2d 782 (1940), this Court recognized that the specific scope of an accountant's duty to a client must be determined primarily by the terms and conditions of the contract of employment. There, an accounting firm had sued Atlas to recover sums allegedly due for unaudited accounting services. Atlas counterclaimed for losses sustained because of the accounting firm's alleged negligence in failing to discover that funds of the client were being embezzled by an employee. This Court upheld a verdict in favor of Atlas, holding that the contract of employment did not impose upon the accountants a duty to investigate and certify the regularity of the information supplied by Atlas' employees. In so doing, however, the Court approved a jury instruction regarding the accountants' duty of care as follows: "They [the accountants] agreed to use such skill in the performance of their agreement as reasonably prudent, skillful accountants would use under the circumstances." Id. at 354-355, 11 A.2d at 786 (emphasis added).

The standard of care required of persons who render professional services has been stated in the Restatement (Second) of Torts § 299A as follows:

Unless he represents that he has greater or less skill or knowledge, one who undertakes to render services in the practice of a profession or trade is required to exercise the skill and knowledge normally possessed by members of that profession or trade in good standing in similar communities. 3

This standard has been followed uniformly by the courts of this Commonwealth in determining claims predicated upon alleged negligence on the part of other professional persons. See: Incollingo v. Ewing, 444 Pa. 263, 282 A.2d 206 (1971) (the standard of skill and knowledge required of a physician is that possessed and employed by physicians generally in the same or a similar locality); Bloomsburg Mills, Inc. v. Sordoni Construction Co., 401 Pa. 358, 164 A.2d 201 (1960) (client of architect has a right to expect architect to use "reasonable and ordinary care and diligence in the application of his professional knowledge to accomplish the purpose for which he is retained"); Hoyer v. Frazee, --- Pa.Super. ---, ---, 470 A.2d 990, 993 (1984) (attorney has a duty to exercise "ordinary skill and knowledge").

Other jurisdictions, as well as most commentators, have adopted for accountants a standard of care similar in all respects to the standard set forth in section 299A of the Restatement. See: Gantt v. Boone, Wellford, Clark, Langschmidt and Pemberton, 559 F.Supp. 1219, 1227 (M.D.La.1983) (applying Louisiana law); Vernon J. Rockler & Co. v. Glickman, Isenberg, Lurie & Co., 273 N.W.2d 647, 650 (Minn.1978), citing Gammel v. Ernst & Ernst, 245 Minn. 249, 253, 72 N.W.2d 364, 367 (1955); Stanley L. Bloch, Inc. v. Klein, 45 Misc.2d 1054, 1056, 258 N.Y.S.2d 501, 505-506 (1965); Richard v. Staehle, 70 Ohio App.2d 93, 97, 434 N.E.2d 1379, 1384 (1980); Kemmerlin v. Wingate, 274 S.C. 62, 64, 261 S.E.2d 50, 51 (1979); Delmar Vineyard v. Timmons, C.P.A., 486 S.W.2d 914, 920 (Tenn.Ct.App.1972); Atkins v. Crosland, 406 S.W.2d 263, 264 (Tex.Civ.App.1966), rev'd on other grounds, 417 S.W.2d 150 (Tex.1967); Prosser, Law of Torts § 32, 161-163 (4th ed. 1971); Accountants' Liability for Negligence--A Contemporary Approach for a Modern Profession, 48 Fordham L.Rev. 401-421 (1979); Anno., Accountant's Malpractice Liability to Client, 92 A.L.R.3d 396 (1979).

The existence of a duty, it has been said, is a matter of foreseeability. Thus, in Migyanko v. Thistlethwaite, 275 Pa.Super. 500, 419 A.2d 12 (1980), this Court said:

In determining the existence of a duty of care, the time honored test formulated by Judge Cardozo is that "[t]he risk reasonably to be perceived defines the duty to be obeyed ...." Palsgraf v. Long Island Railroad Co., 248 N.Y. 339, 344, 162 N.E. 99, 100 (1928)....

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