In Landmark Ruling, Overton et al. v. Todman & Co. et al., Second Circuit Says Accountants have Duty to Speak and Correct Certified Opinions to Protect Investing Public

The U.S. Court of Appeals for the Second Circuit issued an important ruling on February 26, 2007. In Overton et al. v. Todman & Co. et al., the court held that outside auditors have a duty to speak up and correct a previously-issued certified opinion letters or be held primarily liable under the federal securities law.

The Second Circuit has recognized for a long time that “[a]ccountants do have a duty to take reasonable steps to correct misstatements they have discovered in previous [certified] financial statements on which they know the public is relying,” but never extended that principle under the facts of the Overtoncase.

See also Accounting for the Future — Down to four big firms and fearing the effects of even one major suit, the audit industry presses for legal relief.

In this important ruling, the Overton court held “that an accountant violates the “duty to correct” and becomes primarily liable under § 10(b) and Rule 10b-5 when it (1) makes a statement in its certified opinion that is false or misleading when made; (2) subsequently learns or was reckless in not learning that the earlier statement was false or misleading; (3) knows or should know that potential investors are relying on the opinion and financial statements; yet (4) fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and (5) all the other requirements for liability are satisfied.

Here is a copy the landmark opinion of Overton and recent coverage in Compliance Week titled Court Ruling May Broaden Accountant Liability.