Brandon Apparel Group, Inc. (Brandon), made and sold clothing and licensed the making and selling of clothing in exchange for a percentage of the licensees’ sales revenues. Brandon began borrowing money from Johnson Bank and in two years owed the bank $ 10 million. George Korbakes & Company, LLP (GKCO) was the auditor of Brandon during the period at issue in this case. When Brandon was seeking an additional loan from the bank, Brandon instructed GKCO to give the bank the audit report that GKCO had just completed, which GKCO gave to Johnson Bank.

The audit report summarized Brandon’s financial results for the year and revealed that Brandon had serious problems. But the audit report contained several errors. First, the audit report classified a $ 1 million lawsuit Brandon had brought against a third party as an asset, but it was in fact only a contingency that should not have been listed as an asset. Second, Brandon’s sales were inflated by 50 percent because sales of a licensee were treated as if they were Brandon’s sales. However, footnotes in the audit report indicated that Brandon might not prevail in the lawsuit and that Brandon’s sales included those of a licensee.

After receiving the audit report, Johnson Bank made further loans to Brandon. Brandon did not repay Johnson Bank the new money it borrowed. Johnson Bank sued GKCO, alleging that GKCO committed the tort of negligent misrepresentation and was therefore liable for the money lost by the bank as a result of the errors in the audit report prepared by GKCO. Is GKCO, the auditor of Brandon, liable to Johnson Bank for negligent misrepresentation under Section 552 of the Restatement (Second) of Torts? Johnson Bank v. George Korbakes & Company, LLP, 472 F. 3d 439, 2006 U. S. App. Lexis 31058 (United States Court of Appeals for the Seventh Circuit, 2006)