Stroud v. Arthur Andersen & Co.

• Court: Oklahoma Supreme Court
• Writing for the Court: LAVENDER, J.
• Citation: Stroud v. Arthur Andersen & Co., 37 P.3d 783, 2001 OK 76 (Okla. 2001)
• Decision Date: 18 September 2001
• Docket Number: No. 92,033.,92,033.
• Parties: Steve STROUD, an individual, and Stroud Crop, Inc., an Oklahoma corporation, Appellees/Counter-appellants, v. ARTHUR ANDERSEN & CO., a partnership, Appellant/Counter-appellee.

37 P.3d 783

2001 OK 76

Steve STROUD, an individual, and Stroud Crop, Inc., an Oklahoma corporation, Appellees/Counter-appellants, v. ARTHUR ANDERSEN & CO., a partnership, Appellant/Counter-appellee.

No. 92,033.

Supreme Court of Oklahoma.

September 18, 2001.

Supplemental Opinion on Denial of Rehearing December 4, 2001.

Kenneth W. Klingenberg and George H. Brown of Klingenberg & Associates, Oklahoma City, OK; David B. Coffin, Dallas, Texas; Barry K. Roberts, Norman, OK; and Stanley M. Ward, Norman, OK, for the appellees/counter-appellants.

Kenneth N. McKinney, Robert D. Tomlinson and A. Michele Campney of McKinney & Stringer, Oklahoma City, OK; and Philip Allen Lacovara and Joanne E. Benisch of Mayer, Brown & Platt, New York, NY, for the appellants/counter-appellees.

Edwin F. Garrison of Looney, Nichols & Johnson, Oklahoma City, OK; Louis A. Craco and Richard L. Klein of Wilkie Farr & Gallagher, New York, NY; and Richard I. Miller, General Counsel of the American Institute of CPA's, New York, NY, for amicus curiae American Institute of Certified Public Accountants.

J. Angela Ables, James W. Rhodes and Kevin R. Wisner of Kerr, Irvine, Rhodes & Ables, Oklahoma City, OK, for amicus curiae Oklahoma Society of Certified Accountants.

LAVENDER, J.

¶ 1 Resolution of today's cause requires the Court (1) to ascertain for comparative-negligence purposes the relevance of a plaintiff's negligence when a professional's¹ performance is faulted in a negligence action and (2) to decide whether there is competent evidence in the record which would sustain the jury's verdict.

I. FACTS AND PROCEDURAL HISTORY

¶ 2 Steve Stroud, individually, [Stroud] and Stroud Crop, Inc. [SCI] brought an action against Arthur Andersen & Co. [Andersen or defendant], a professional accounting firm, seeking damages for economic injuries allegedly emanating from flawed audits of SCI and Insurance Company of the Prairie States' [ICOPS] financial statements.² The audits were prepared by Andersen. Stroud over a period of years had built ICOPS into one of the larger providers of crop insurance in the United States. SCI was the general managing agent and operator of ICOPS. Both companies were owned primarily by Stroud and their indebtedness was collateralized with among other things land and personalty owned by Stroud in an individual capacity.

¶ 3 In the latter part of 1987 SCI — at one of its lenders' insistence — sought to have its December 31, 1987 balance sheet audited. It hired the defendant to perform the required accounting in accordance with generally accepted auditing standards [GAAS].³ Stroud/SCI assert that the audits for 1987 and later years⁴ were negligently prepared by Andersen because (1) a substantial misstatement of SCI's liabilities (in excess of three million dollars) went undetected in them and (2) Andersen failed to identify and communicate to SCI that certain of its internal-accounting mechanisms were "material weaknesses" (as that term is understood under GAAS⁵).

¶ 4 Next, plaintiffs assert that it relied upon the flawed audited statements of SCI's financial condition to make certain business decisions which ultimately rendered SCI/ICOPS unable to sustain economic viability during the 1990's. Lastly, Stroud/SCI allege that Andersen — after becoming aware of the understatement of SCI's liabilities — failed to extend to its clients (SCI/ICOPS) the duty of care required by the Code of Professional Conduct for accountants.

¶ 5 Andersen defends by asserting (1) that plaintiffs failed to prove by sufficient evidence that its audits of SCI and ICOPS were flawed and (2) that the economic losses suffered by SCI resulted solely from (a) bad management decisions made by Stroud/SCI and (b) SCI's flawed internal accounting procedures.⁶ Andersen also contests Stroud's right as an individual to seek damages for any audit-related injuries. It is Andersen's contention that if the alleged economic injuries were compensable at all, they would be so only to the corporate entity (SCI) and not to its shareholder (Stroud).

¶ 6 Before beginning its deliberations the jury was instructed by the trial judge on negligence, wanton and reckless conduct, and punitive damages among other issues. Jury Instruction No. 16⁷ was given at this time which in substance combined what is commonly referred to as the "audit interference rule"⁸ with comparative-negligence concepts identified in Oklahoma Uniform Jury Instruction [OUJI-CIV (second)] Instruction No. 9.18. Andersen objects to the trial court's adoption of the audit interference rule asserting that it contravenes the scheme of comparative-negligence enacted in Oklahoma.⁹

¶ 7 At the conclusion of an eleven-day jury trial judgment was awarded to the plaintiffs on a jury verdict. Both compensatory and punitive damages were awarded. Andersen appealed. The Court of Civil Appeals [COCA] held that Jury Instruction No.16 which adopted the audit interference rule represented a fundamental-law error requiring the judgment's reversal. The case was remanded for a new trial.

¶ 8 Appellees sought certiorari which was granted.

II STANDARD OF REVIEW

¶ 9 When the Court is called upon to review a jury's verdict in an action at law, that verdict is conclusive as to all disputed facts and conflicting statements.¹⁰ Where (1) there is any competent evidence which reasonably supports the jury's verdict and (2) there are no prejudicial errors shown in the trial court's jury instructions, neither the verdict nor the judgment based thereon will be disturbed on review.¹¹ Further, in the appellate process the Court will not engage in deciding which party produced evidence of the greater weight.¹² The decision — where the preponderance of the evidence lies — is left to the jury which is the exclusive judge of the witnesses' credibility.¹³ Lastly, in assaying the evidence's sufficiency to sustain the judgment the Court views all evidence in the light tending to support the judgment, "together with every reasonable inference deducible therefrom, rejecting all evidence adduced by the adverse party which conflicts with it."¹⁴

¶ 10 When the Court reviews a claimed fundamental-law error in a jury instruction as to which a timely objection was not made at trial, we apply a plain error rule and require a showing that the instruction, when given, was erroneous as a matter of law and in effect caused injury, i.e, was demonstrably prejudicial and not just harmless. To justify reversal the party asserting error bears a high burden of proving that the error was obvious or otherwise seriously affected the judicial proceedings' fairness.

¶ 11 Lastly, the trial court's denial of prejudgment interest to Stroud/SCI essentially presents a question of law which is reviewed de novo.¹⁵ An appellate court has plenary, independent and non-deferential authority to reexamine a trial court's legal rulings.¹⁶

III

IT WAS NOT ERROR TO INSTRUCT THE JURY THAT IT COULD COMPARE THE PLAINTIFF'S NEGLIGENCE TO ANDERSEN'S ONLY INSOFAR AS IT INTERFERED WITH THE LATTER'S PROFESSIONAL UNDERTAKING (i.e., AUDIT)

¶ 12 In today's forensic contest it is necessary to understand the context in which the determinative issues arose before their resolution is addressed. It is only when one realizes that the asserted errors relate to separate components [i.e., liability and damages] of the plaintiff's negligence — action that the Court's pronouncement can be fully appreciated.

¶ 13 To establish a prima facie case of negligence Stroud/SCI must prove: (1) that Andersen owed a duty of care — arising from its rendition of professional accounting services — to the plaintiffs, (2) that the duty was breached, and (3) that injury and the resultant damages were directly the result of Andersen's failure to perform its duty.¹⁷ The plaintiffs are required to clear two evidentiary hurdles to be awarded compensatory damages. First, they must prove that Andersen breached that degree of duty which was owed to them and which resulted in their injury. Then they must adduce evidence establishing the amount of compensatory damages which is their due.

¶ 14 Initially, today's pronouncement enunciates the criteria to be used for identifying the scope of a plaintiff's conduct which is relevant when a jury decides whether a defendant's conduct is negligent and caused injury. Then we assess whether the plaintiffs met their burden of proof as to damages. When a jury finds the plaintiff has proved a prima facie case of negligence, the plaintiff is entitled to recover those damages which are foreseeable and naturally flow from the defendant's negligent acts.¹⁸ In the latter regard it is axiomatic that a defendant is not liable for damages attributable solely to the plaintiff's conduct but instead is only liable for those damages which are proved by the plaintiff to extend from the defendant's established breach-of-duty, i.e., negligence. Simply stated, the latter issue is a question of proving one's damages. Assessment of the compensatory damages resulting or flowing from the defendant's negligent conduct presents a factual question which lies squarely within the jury's province.

A

¶ 15 When a certified public accounting firm is engaged for audit purposes, it is employed to discover "inadvertent errors" in its client's bookkeeping systems and further to protect the client from its own employees' failure to find errors in the company's books and accounting system. Stated in general terms, the auditor is retained to give an opinion whether in conformity with GAAP [Generally Accepted Accounting Principles] the client's financial statements fairly represent its financial position.¹⁹

¶ 16 A certified public accountant [CPA] owes a different duty of care to his/her client when rendering professional services than the duty of ordinary care which members of society owe to each other. It is Andersen's alleged breach of its professional duty as an auditor which lies at the heart of Stroud/SCI's...