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Docket No. 94676-Agenda 10-May 2003.

THE BOARD OF TRUSTEES OF COMMUNITY COLLEGE 
DISTRICT No. 508, County of Cook, Appellee, v. COOPERS & 
LYBRAND, Appellant.

Opinion filed December 18, 2003.

JUSTICE KILBRIDE delivered the opinion of the court:

The Board of Trustees of Community College District No. 508(Board) sued the accounting firms of Coopers & Lybrand (Coopers) andArthur Andersen (Andersen). The Board sought more than $50 million incompensatory damages, allegedly resulting from the failure of those firmsto discover and report to the Board inappropriate investments made byPhillip R. Luhmann, the treasurer and chief financial officer of CityColleges of Chicago (City Colleges). The Board sought damages in tortfrom both Andersen and Coopers, jointly and severally, and also soughtdamages resulting from breach of contract from both firms. Prior to trial,Andersen settled with the Board and the Board filed an amendedcomplaint seeking relief against only Coopers. The jury found damages onthe tort claim in the amount of $23 million, reduced to $12.65 millionbecause of the Board's contributory fault. The jury also awarded damageson the Board's contract claim. Both parties appealed.

The appellate court affirmed. 333 Ill. App. 3d 225. We grantedCoopers' petition for leave to appeal (177 Ill. 2d R. 315), and the Boardseeks cross-relief (155 Ill. 2d R. 318). We granted the American Instituteof Certified Public Accountants leave to file a brief as amicus curiae insupport of Coopers. 155 Ill. 2d R. 345. We now affirm in part andreverse in part, and remand the cause to the trial court with directions.

I. BACKGROUND

The Board is a body politic and corporate created under the PublicCommunity College Act (110 ILCS 805/1-1 et seq. (West 1994)). TheBoard operates and manages the City Colleges of Chicago. City Collegesis a public agency and its investment policies must comply with the PublicFunds Investment Act (Investment Act) (30 ILCS 235/1 et seq. (West2002)). Accordingly, in 1988, 1990, and 1992, the Board adoptedresolutions authorizing its treasurer to invest City Colleges' funds only ininstruments permitted by the Investment Act. The resolutions provided thatthe funds should be invested only in securities guaranteed as to paymentof principal and interest by the full faith and credit of the United States ofAmerica. The securities were required to be of a type that would matureor be redeemable before funds were needed, in the opinion of thetreasurer, to provide for the Board's expenditures. The investment policydirected that securities should generally be purchased with the intent ofholding to maturity so as to minimize interest rate risk. Despite this clearmandate, the treasurer, Luhmann, invested in securities not authorized bythe resolutions. Further, he repeatedly engaged in a practice known as"pairing off" securities, buying a security and expecting to sell it for a profitbefore he was required to pay for it.

In February 1994, the Board chairman, Ron Gidwitz, learned thatLuhmann had violated the City Colleges' investment policy and declareda "financial emergency." Luhmann was terminated, and the Boardinstructed City Colleges to sell the securities that did not comport with theinvestment policy as soon as prudently possible.

In its original complaint, the Board alleged that during fiscal years1991, 1992, and 1993, Luhmann invested in securities not authorized bythe Board's investment policy and in violation of the Investment Act.Andersen audited City Colleges' financial statements for the fiscal years1991 and 1992. Coopers audited the financial statements for fiscal year1993. The complaint alleged that the failure of the auditors to identify andreport Luhmann's investment policy violations to the Board amounted toa breach of each firm's duty to comply with generally accepted accountingprocedures. The Board claimed that if it had been informed of theinvestment policy violations, it would have taken steps to respond andavoided a dramatic decline in the value of the securities, claimed to be inexcess of $50 million and not discovered until 1994. Thus, the conduct ofboth accounting firms was alleged to be the proximate cause of CityColleges' financial losses, and the prayer for relief sought recovery againstboth firms, jointly and severally.

Although Luhmann's investment policy violations occurred throughoutthe fiscal years in question, the investments resulting in the precipitouslosses were not made until both Andersen and Coopers had completedtheir audits. Thus, the gravamen of the complaint was that if either auditingfirm had informed the Board that the securities in the City Colleges'portfolio violated its investment policy, the Board would have ended thoseinvestment practices. Hence, the later investments that ultimately resultedin the claimed losses would not have occurred.

Andersen and the Board settled prior to trial. The trial court foundthe settlement to be in good faith. The Board filed an amended complaint,deleting all references to Andersen and the 1991 and 1992 audits, butidentical in all other respects to the original complaint.

Coopers asserted the affirmative defense of comparative fault.However, prior to trial, the court ruled that pursuant to the "auditinterference" doctrine, only conduct by the Board affecting Coopers'preparation of the audit could be considered. Thus, Coopers was notpermitted to argue that extensive evidence of the Board's oversight ofLuhmann's investment activities and its knowledge of possible violationsof investment policy supported a finding of contributory fault.

At trial, Board chairman Ronald Gidwitz testified that Luhmannfurnished the Board with regular summaries of the current status of CityColleges' investments at various times during the fiscal year. Five reportswere furnished during fiscal year 1993, showing the investments Luhmannhad made, including treasury, Government National Mortgage Association(GNMA) Securities, and other agency mortgage-backed securities. Thereports reflected wide fluctuations in securities from quarter to quarter,indicating that securities were not being held to maturity. No objection wasraised by the Board to this practice.

Gidwitz admitted that he knew some mortgage-backed securitieswere not being held to maturity. He testified that Luhmann told him he hadsold treasury bonds prior to maturity. He admitted making "mental notes"of these matters, intending to discuss them with Luhmann, but he neverspoke with either Luhmann or Coopers about any investmentnoncompliance.

On October 9, 1993, shortly before the audit was concluded,Luhmann told Coopers that there had been no significant change in theinvestment portfolio since June 30, 1993. At another meeting, Luhmannand City Colleges' acting controller, Michael Wagner, represented to theauditors that there had been no significant events or transactions since thefiscal year-end that should be considered for inclusion or disclosure in thefinancial statements and that there were no significant new commitmentsor contingencies since the end of the fiscal year. Despite theserepresentations, Luhmann testified at trial that City Colleges' portfoliochanged after June 1993, a fact confirmed by Coopers' expert witness,Professor John McConnell.

City Colleges also furnished Coopers with a representation letterdated October 15, 1993, signed by Wagner, stating that City Collegeswas not aware of any "violations or possible violations of laws orregulations whose effects should be considered for disclosure in thefinancial statements or as a basis for recording a loss contingency" and that"no matters or occurrences have come to our attention to the date of thisletter that would materially affect the financial statements and relateddisclosure for the year ended June 30, 1993." Gary Seidelman, Coopers'engagement partner, testified that Coopers delivered its audit report onOctober 16, 1993, and that it would not have done so without therepresentation letter in hand.

The jury heard expert testimony regarding the financial losses causedby Luhmann's investment practices. Dr. Lisette Cooper, the Board'sexpert, attributed nearly $65 million in losses to Coopers' failure tomonitor compliance with the investment policy and to advise the Board ofthe noncompliance. Coopers disputed that any losses resulted from itsfailure to comply with applicable professional accounting standards.However, Coopers' investment expert, Dr. John McConnell, concludedthat financial losses on securities purchased by Luhmann after June 30,1993, but before Coopers finished its audit, amounted to approximately$23 million.

The jury returned a verdict for the Board, and both sides appealed,asserting various grounds for relief. The appellate court affirmed judgmenton the verdict, rejecting Coopers' argument that the trial court erred inapplying the audit interference doctrine, and holding that Coopers was notentitled to a setoff for the Andersen settlement. 333 Ill. App. 3d at 239,241.

The appellate court also rejected the Board's contentions that it wasentitled to a judgment notwithstanding the verdict on the issue ofcomparative fault and that the jury was improperly instructed on that issue.333 Ill. App. 3d at 243. Those holdings are assigned as error in theBoard's application for cross-relief.

II. ANALYSIS

Coopers asserts that it was improperly restricted in its ability topresent evidence of the Board's contributory negligence by the trialcourt's application of the audit interference doctrine. Coopers argues thatthe doctrine is inconsistent with principles of comparative fault. WhetherIllinois law limits the defense of contributory fault in cases againstaccountants is a matter of first impression for this court. Since this issuepresents a question of law, our review is de novo. Woods v. Cole, 181Ill. 2d 512, 516-17 (1998).

A. The Audit Interference Doctrine

The audit interference doctrine was first adopted by a New Yorkcourt in National Surety Corp. v. Lybrand, 256 A.D. 226, 9 N.Y.S.2d554 (1939). The court in National Surety held that the negligence of anemployer who hires an accountant to audit the business is a defense onlywhen it has contributed to the accountant's failure to perform his contractand to report the truth. National Surety, 256 A.D. at 235, 9 N.Y.S.2dat 563. The audit interference doctrine as announced in National Suretywas applied in Illinois in Cereal Byproducts Co. v. Hall, 8 Ill. App. 2d331 (1956). In Cereal Byproducts, the appellate court held thatcontributory negligence could not be asserted by the auditor when therewas no evidence that the client interfered with the audit. CerealByproducts, 8 Ill. App. 2d at 336.

National Surety and Cereal Byproducts were decided long beforethis court abolished the doctrine of contributory negligence as an absolutebar to recovery and replaced it with comparative fault in Alvis v. Ribar,85 Ill. 2d 1, 24-25 (1981). The comparative fault rule adopted in Alviswas modified by statute in 1986 when the legislature provided for alimitation on recovery in tort actions, as follows:

"In all actions on account of bodily injury or death or physicaldamage to property, based on negligence, or product liabilitybased on strict tort liability, the plaintiff shall be barred fromrecovering damages if the trier of fact finds that the contributoryfault on the part of the plaintiff is more than 50% of the proximatecause of the injury or damage for which recovery is sought. Theplaintiff shall not be barred from recovering damages if the trierof fact finds that the contributory fault on the part of the plaintiffis not more than 50% of the proximate cause of the injury ordamage for which recovery is sought, but any damages allowedshall be diminished in the proportion to the amount of faultattributable to the plaintiff." Ill. Rev. Stat. 1987, ch. 110, par.2-1116, codified at 735 ILCS 5/2-1116.⁽¹⁾

Since the 1986 version of statute, in effect at the time the Board'scause of action accrued, was applicable only to "actions on account ofbodily injury or death or physical damage to property," it arguably was notapplicable to tort actions where recovery for economic loss is allowed,including actions arising from negligent representations made by one whois in the business of supplying information for the guidance of others in theirbusiness transactions. See, e.g., Moorman Manufacturing Co. v.National Tank Co., 91 Ill. 2d 69, 86 (1982) ("[t]ort theory isappropriately suited for personal injury or property damage ***[;] [t]heremedy for economic loss *** lies in contract"). Therefore, the "pure"comparative fault rule announced in Alvis remained applicable to tortactions for recovery of economic loss, such as accounting malpracticeactions. See, e.g., Congregation of the Passion, Holy Cross Provincev. Touche Ross & Co., 159 Ill. 2d 137, 164 (1994) ("[t]ort law hastraditionally afforded an avenue of recovery for accountant malpractice").

In 1992, the legislature added section 30.2 to the Illinois PublicAccounting Act (Accounting Act) (225 ILCS 450/30.2 (West 1994)) toprovide that the statutory comparative fault modifications apply to tortactions against accountants. The 1992 version of section 30.2, in effect atthe time the Board's cause of action accrued, provided in relevant part:

"Contributory Fault. Except in causes of action based onactual fraud or intentional misrepresentation, the principles ofliability set forth in Sections 2-1116 and 2-1117 of the Code ofCivil Procedure shall apply to all claims for civil damages broughtagainst any person, partnership, corporation, or any other entitycertified, licensed, or practicing under this Act, or any of itsemployees, partners, members, officers, or shareholders that arealleged to result from acts, omissions, decisions, or other conductin connection with professional services." 225 ILCS 450/30.2(West 1994), amended by Pub. Act 89-380,