An investor invested in a company based on draft financial statements prepared by an accounting firm. After the company collapsed and was declared insolvent, the investor claimed that the accounting firm was negligent in preparing the financial statements and is responsible for the damage caused to it.
The Court held that the accounting firm was not negligent in preparing the financial statements and therefore was not liable for the investor's damage. The tort of negligence comprises five elements: A duty of care, breach of the duty, damage, factual causation between the breach and the damage and the damage being within the “zone of danger. An accountant has a duty of care as a professional with respect to the information presented by him, including to third parties. In addition, an accountant who audits a company's financial statements is expected to get to the root of the company's financial situation and act with due diligence and caution in order to examine and verify the reliability of the audited entity's financial data, but it is not expected to perform a 100% audit because that is not a due diligence examination, but only an audit of financial statements. Here, the data presented by the company was examined by the accountant, who requested and received supporting evidence, and the accountant challenged the company's assessments and updated them according to its discretion. In addition, the investor, who based its investment on a draft financial statement and not on a final version and did not conduct a comprehensive due diligence in a manner that imposes contributory liability on it, based the investment decision on a number of factors, and not solely on the financial statements, so that there was no causal connection between the financial statements and the damage caused to the investor.