## Facts

- Intercontinental Metals Corporation (IMC) retained an accounting firm to audit IMC’s financial statements for fiscal years ending September 30, 1980 and September 30, 1981, under generally accepted auditing standards and to opine under generally accepted accounting principles.
- The firm issued a qualified audit opinion stating IMC’s net worth as of September 30, 1981 was approximately $6.96 million.
- A trade creditor, which sold steel to IMC on open account, did not obtain or review the audited financial statements.
- The creditor instead reviewed Dun & Bradstreet reports that summarized the audit and repeated the reported net worth figure and the qualification.
- The creditor alleged the audit materially overstated IMC’s net worth (claiming IMC actually had a large negative net worth) and that it extended additional credit in reliance on the summary.
- IMC later filed for bankruptcy; the creditor recovered only part of what it was owed.
- The creditor sued the accounting firm, asserting (among other claims) breach of the audit engagement contract as an intended third-party beneficiary and alleging reliance-based harm.

## Issues

1. Whether a trade creditor of the audited company is an intended third-party beneficiary of the audit engagement contract and may sue the accountants for breach of that contract.
2. What duty standard governs an accountant’s tort liability for negligent misrepresentation to non-client third parties who rely on audit-related information.

## Decision

- The Supreme Court of North Carolina held that the trade creditor was not an intended third-party beneficiary of the audit engagement contract and could not recover on a contract theory.
- The court adopted Restatement (Second) of Torts § 552 as the governing rule for accountants’ negligent-misrepresentation liability to non-client third parties.
- The court rejected both strict privity as the sole limit and a broad foreseeability standard as the basis for duty.
- The court reversed the Court of Appeals to the extent it allowed the creditor to proceed on a third-party beneficiary contract theory and clarified the limited scope of any tort duty to non-clients.

## Legal Principles

- A nonparty may enforce a contract only if the contracting parties intended to confer a legally enforceable benefit on that nonparty; foreseeable benefit alone makes the nonparty an incidental beneficiary without contract rights.
- An audit engagement to serve the client’s needs, without clear indication of intent to create enforceable rights in specific creditors, does not make trade creditors intended third-party beneficiaries.
- For negligent misrepresentation by accountants, North Carolina follows Restatement (Second) of Torts § 552: liability is limited to loss suffered by the person or a limited group of persons for whose benefit and guidance the information is supplied, and only in transactions the accountant intends to influence or knows the recipient intends to influence.
- The § 552 rule limits exposure to a determinate class and transaction type, avoiding indeterminate liability to an indeterminate class.
- A plaintiff must show justifiable reliance on the accountant-supplied information as required by North Carolina negligent-misrepresentation doctrine; reliance principles apply in addition to the § 552 duty limitation.

## Conclusion

The court barred a trade creditor’s contract claim against an auditor because the audit engagement did not intend to grant creditors enforceable contract rights, and it set the tort-duty boundary for accountant negligent misrepresentation by adopting Restatement § 552’s limited-class approach rather than strict privity or broad foreseeability.


Raritan River Steel Co. v. Cherry, Bekaert & Holland, 407 S.E.2d 178 (N.C. 1991)