PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

GARY ELLIS, 

Plaintiff-Appellee,

v.  No. 07-1352

GRANT THORNTON LLP,

Defendant-Appellant. 

Appeal from the United States District Court

for the Southern District of West Virginia, at Bluefield.

David A. Faber, Chief District Judge.

(1:04-cv-00043)

Argued: March 19, 2008

Decided: June 25, 2008

Before DUNCAN, Circuit Judge, HAMILTON,

Senior Circuit Judge,

and William L. OSTEEN, Jr., United States District Judge

for the Middle District of North Carolina,

sitting by designation.

Reversed by published opinion. Senior Judge Hamilton wrote the

opinion, in which Judge Duncan and Judge Osteen joined. 

COUNSEL

ARGUED: Stanley Julius Parzen, MAYER BROWN, L.L.P., Chicago, Illinois, for Appellant. Benjamin Lee Bailey, BAILEY &

GLASSER, L.L.P., Charleston, West Virginia, for Appellee. ON
BRIEF: John H. Tinney, Kimberley R. Fields, THE TINNEY LAW

FIRM, P.L.L.C., Charleston, West Virginia; Bradley J. Andreozzi,

MAYER BROWN, L.L.P., Chicago, Illinois; Mark W. Ryan, Andrew

J. Morris, MAYER BROWN, L.L.P., Washington, D.C., for Appellant. Eric B. Snyder, BAILEY & GLASSER, L.L.P., Charleston,

West Virginia, for Appellee.

OPINION

HAMILTON, Senior Circuit Judge: 

The principal issue presented in this appeal is whether Grant

Thornton LLP (Grant Thornton), an accounting firm retained by First

National Bank of Keystone (Keystone), in response to an investigation by the Office of the Comptroller of the Currency (OCC) into

Keystone’s banking activities, owed a duty of care under the West

Virginia law of negligent misrepresentation to Gary Ellis, who allegedly relied on oral statements made by Stan Quay (Quay), a Grant

Thornton partner, and a Grant Thornton audit report of Keystone’s

1998 financial statements in deciding to accept the job as president of

Keystone. We hold that Grant Thornton owed Ellis no such duty

under West Virginia law. Accordingly, we reverse the judgment of

the district court, which found in favor of Ellis on his negligent misrepresentation claim against Grant Thornton. 

I

In late June 1999, the OCC began to intensify its ongoing investigation into Keystone’s banking activities. The OCC’s investigation

revealed that Keystone’s books overstated the value of the loans Keystone owned by over $515 million. Based on these overstatements,

Keystone was declared insolvent and was closed on September 1,

1999. This case is yet another case that comes before this court in the

wake of Keystone’s collapse. See Gariety v. Vorono, No. 06-2248,

2008 WL 110906 (4th Cir. January 8, 2008) (unpublished) (civil

action filed by individuals who purchased Keystone stock between

September 28, 1998 and September 1, 1999); FDIC v. Bakkebo, 506

F.3d 286 (4th Cir. 2007) (civil action brought by FDIC); Gariety v.

2 ELLIS v. GRANT THORNTON LLP
Grant Thornton, LLP, 368 F.3d 356 (4th Cir. 2004) (securities class

action by persons who purchased stock prior to Keystone’s failure);

United States v. Cherry, 330 F.3d 658 (4th Cir. 2003) (criminal

appeal); United States v. Church, 11 Fed. App’x. 264 (4th Cir. 2001)

(unpublished) (same). This case concerns Ellis, who took the job as

president of Keystone in April 1999. According to Ellis, he took the

position only because he relied on negligent misrepresentations made

by Quay and made by Grant Thornton in the audit report. 

A

Prior to 1992, Keystone was a small community bank providing

banking services to clients located primarily in McDowell County,

West Virginia. Before its collapse, Keystone was a national banking

association within the Federal Reserve System, the deposits of which

were insured by the FDIC. 

In 1992, Keystone began to engage in an investment strategy that

involved the securitization of high risk mortgage loans. Between 1992

and 1998, Keystone originated nineteen securitizations. In general,

Keystone would acquire Federal Housing Authority or high loan to

value real estate mortgage loans from around the United States, pool

a group of these loans, and sell interests in the pool through underwriters to investors. The pooled loans were serviced by third-party

loan servicers, including companies like Advanta and Compu-Link.

Keystone retained residual interests (residuals) in each loan securitization. The residuals were subordinated securities that would receive

payments only after all expenses were paid and all investors in each

securitization pool were paid. Thus, Keystone stood to profit from a

securitization only after everyone else was paid in full. The residuals

were assigned a value that was carried on the books of Keystone as

an asset. Over time, the residual valuations came to represent a significant portion of Keystone’s book value. 

From 1993 until 1998, when the last loan securitization was completed, the size and frequency of these transactions expanded from

about $33 million to approximately $565 million for the last one in

September 1998. All told, Keystone acquired and securitized over

120,000 loans with a total value in excess of $2.6 billion. 

ELLIS v. GRANT THORNTON LLP 3
The loan securitization business appeared to be quite profitable. On

paper, Keystone’s assets grew from $107 million in 1992 to over $1.1

billion in 1999. In reality, however, the securitization program proved

highly unprofitable. Due to the risky nature of many of the underlying

mortgage loans, the failure rate was excessive. As a result, the residual interests retained by Keystone proved highly speculative and, in

actuality, they did not perform well. 

Keystone’s valuation of the residuals was greater than their market

value. J. Knox McConnell, Keystone’s largest shareholder until his

death, Terry Church (Church), another Keystone director, and others

concealed the failure of the securitizations by falsifying Keystone’s

books. Bogus entries and documents hid the true financial condition

of Keystone from the bank’s directors, shareholders, depositors, and

federal regulators.

Keystone’s irregular bank records drew the attention of the OCC,

which began an investigation into Keystone’s banking activities. This

investigation revealed major errors in Keystone’s accounting records

that financially jeopardized Keystone. In May 1998, the OCC

required Keystone to enter into an agreement obligating Keystone to

take specific steps to improve its regulatory posture and financial condition. This agreement required Keystone to, among other things,

retain a nationally recognized independent accounting firm "to perform an audit of the Bank’s mortgage banking operations and determine the appropriateness of the Bank’s accounting for purchased

loans and all securitizations." (J.A. 3043). In August 1998, Keystone

retained Grant Thornton as its outside auditor. 

Under the agreement between Grant Thornton and Keystone, Grant

Thornton was to, among other things, perform for Keystone, in accordance with Generally Accepted Auditing Standards (GAAS), an audit

of Keystone’s consolidated financial statements as of December 31,

1998. Quay was the lead Grant Thornton partner on the Keystone

audit. Susan Buenger (Buenger), a junior manager, performed substantial work on the audit as well. 

Grant Thornton performed the audit on Keystone’s 1998 financial

statements. Keystone’s 1998 financial statements reflected ownership

of more than $515 million in loans that it did not own. Due to negli4 ELLIS v. GRANT THORNTON LLP
gence on the part of both Quay and Buenger, Grant Thornton’s audit

did not uncover the $515 million discrepancy.1 In fact, on March 24,

1999, Quay presented several members and prospective members of

Keystone’s board and Keystone’s shareholders with draft copies of

Keystone’s 1998 financial statements and told them that Keystone

was going to get an unqualified or "clean" audit opinion on its 1998

financial statements. (J.A. 2701).2 At the shareholders meeting the

1Grant Thornton does not challenge the district court’s finding of negligence in this appeal, electing to assume, for the sake of argument, that

Quay and Buenger were negligent in preparing the audit and making any

statements concerning the soundness of Keystone’s financial condition.

Given Grant Thornton’s position, we, too, will assume, without deciding,

that Quay and Buenger were negligent in preparing the audit and making

any statements concerning the soundness of Keystone’s financial condition. 

2Although accountants provide a variety of services to clients, their

primary function is auditing. Samuel S. Paschall, Liability to NonClients: The Accountant’s Role and Responsibility, 53 Mo. L. Rev. 693,

698 (1988). In a typical audit, the financial statements of an entity, usually a corporation, are verified by examining the corporation’s accounting records and supporting evidence. Id. After examining such records

and evidence, the accountant expresses an opinion as to whether such

statements fairly represent the corporation’s actual financial position in

accordance with the Generally Accepted Accounting Principles (GAAP).

Id. at 698-99. For practical reasons of cost and time, an accountant is

rarely able to examine every accounting transaction of a corporation.

Denise M. Orlinsky, Note, An Accountant’s Liability to Third Parties:

Bily v. Arthur Young & Co., 43 DePaul L. Rev. 859, 862 (1994). Therefore, the performance of an audit requires a high degree of professional

skill and judgment, as the accountant can only test the output of the corporation’s accounting systems. Id. In performing an audit, an accountant

follows procedures outlined in the GAAS. Id. The end result of an audit

is the audit report or opinion, which evaluates the information obtained

to determine whether the corporation’s financial statements fairly represent the financial position of the corporation in accordance with the

GAAP. Id. at 863-64. The audit opinion is usually expressed in a letter

addressed to the client and can be one of four types: an unqualified audit

opinion, a qualified audit opinion, an adverse audit opinion, or a disclaimer audit opinion. Id. at 864. An unqualified audit opinion is an

expression of opinion by the accountant without any exceptions, reservations, or qualifications that the financial statements of the corporation

ELLIS v. GRANT THORNTON LLP 5
next day, Quay also distributed copies of Keystone’s financial statements. At that time, Quay reiterated that Keystone was going to get

a clean audit opinion on its 1998 financial statements. 

On April 19, 1999, even though Keystone was, in fact, insolvent

as of the end of 1998, Grant Thornton issued and delivered to Keystone’s board its audit opinion stating that Keystone’s financial statements were fairly stated in accordance with the GAAP and reflecting

a shareholder’s equity of $184 million. The intent of the report was

plainly stated on the first page of the report: "This report is intended

for the information and use of the Board of Directors and Management of The First National Bank of Keystone and its regulatory agencies and should not be used by third parties for any other purpose."

(J.A. 2903). 

The audited financial statements provided by Quay to the board on

April 19, 1999 were substantially the same as the financial statements

Quay had provided board members and shareholders in March 1999.

Based on Grant Thornton’s audit report, Keystone’s board continued

to declare dividends and operate the bank. 

B

In 1984, Gary Ellis was President of the Bank of Dunbar. The Bank

of Dunbar was later merged into United National Bank (United) at

which time Ellis joined the management team at United, eventually

represent its financial position and the results of its operations. Id. A

qualified audit opinion, on the other hand, states that improper accounting treatment has been applied to one or more items and that, consequently, the financial statements are not in compliance with the GAAP.

Id. at 865. An adverse audit opinion is issued if any items have a material

and pervasive effect on the financial statement, thus destroying their fairness of presentation. Id. A disclaimer audit opinion is issued if the

accountant is unable to form an opinion because of serious limitations on

the scope of the examination of the audit. Id. at 866. Typically, the corporation then uses this audit opinion for its own business planning, and

the audit opinion is used to inform outside parties as to the financial

health of the audited company. Paschall, Liability to Non-Clients: The

Accountant’s Role and Responsibility, 53 Mo. L. Rev. at 699. 

6 ELLIS v. GRANT THORNTON LLP
becoming its president. From the time of the merger with the Bank

of Dunbar until the time Ellis left United, United more than doubled

in size. In 1998, United merged with George Mason Bankshares of

Virginia. In the spring of 1999, following the merger, Ellis voluntarily

began looking for employment outside United. Ellis had dealt with

Keystone in the past, and, on March 19, 1999, Billie Cherry (Cherry),

chairman of Keystone’s board, called Ellis and invited Ellis to attend

Keystone’s annual shareholders meeting on March 25, 1999. During

the call, Cherry suggested that Ellis should consider becoming president of Keystone. 

Ellis was not fired or told to leave United, had no deadline for leaving United, and could have remained at United rather than leaving for

the Keystone position. Ellis attended Keystone’s board meeting on

March 24, 1999, at which the board granted Ellis’ request to review,

upon the signing of a confidentiality agreement, the financial condition of the bank. Although it is not clear from the record whether a

confidentiality agreement was signed, the Keystone board permitted

Ellis to discuss the financial condition of the bank with Quay and

other Keystone insiders with the understanding that the information

be kept confidential. Consequently, following the Keystone board

meeting on March 24, 1999, Ellis met Quay and two other outside

directors at a bar at the Fincastle Country Club. Quay spoke with Ellis

and the two outside directors because Keystone did not have a chief

financial officer, thus making Quay the only person capable of going

over the financial statements with the others. At the country club,

Quay told Ellis and the two outside directors that Keystone was going

to receive a "clean [audit] opinion." (J.A. 401). Ellis also attended the

March 25, 1999 shareholders’ meeting at which Quay informed the

group that Grant Thornton was going to give Keystone a clean audit

opinion for 1998. On March 30, 1999, Ellis visited Keystone. During

this visit, Quay told Ellis once again that Keystone would receive a

clean audit opinion for 1998. 

On April 2, 1999, Ellis met with his attorneys to draft a proposed

employment agreement with Keystone. During the first two weeks of

April 1999, Ellis met with Church and others regarding their expectations for him. It was decided that Ellis would be responsible for the

"banking" business at Keystone as opposed to the mortgage loan

securitizations. On April 19, 1999, at a Keystone board meeting, Ellis

ELLIS v. GRANT THORNTON LLP 7
reviewed Grant Thornton’s final audit report on Keystone for 1998.

The board voted to approve Ellis’ hiring as president of Keystone.

Ellis officially resigned from United by letter dated April 20, 1999.

Ellis’ employment contract was signed on April 26, 1999.3 According

to Ellis, he relied on Grant Thornton’s audit, which was consistent

with Quay’s earlier March 1999 statements that Grant Thornton was

going to issue a clean audit opinion for 1998, in deciding to accept

the job as president of Keystone. 

C

After being named as a defendant in the Gariety v. Grant Thornton,

LLP securities class action, Ellis filed a cross-claim against Grant

Thornton for negligent misrepresentation under West Virginia law in

which he sought to recover damages in the form of lost earnings. The

district court consolidated Ellis’ negligent misrepresentation claim for

trial with the claims asserted by the FDIC in FDIC v. Grant Thornton,

LLP, 1:00-cv-0655, (S.D.W.Va. January 15, 2004) (order). The case

was tried in the summer of 2004. In March 2007, the district court

ruled in favor of Ellis on his negligent misrepresentation claim and

found that he was entitled to $2,419,233 in damages. The district

court found that, in accepting the job as president of Keystone, "Ellis

relied on the financial statements Quay gave him," "Quay’s oral representations," and the Grant Thornton audit report. (J.A. 2706). The

district court also found that "Quay intended and knew that Ellis

would rely on his statements." (J.A. 2707). In view of these findings

of fact, the district court concluded that Grant Thornton, as the auditor

of Keystone, was liable to Ellis under the West Virginia law of negligent misrepresentation, citing First National Bank of Bluefield v.

Crawford, 386 S.E.2d 310 (W. Va. 1989), because Grant Thornton

(through Quay’s oral statements and the audit report) made negligent

misrepresentations concerning the financial condition of Keystone

knowing that Ellis would receive and rely upon those representations

in making his decision to accept or reject employment with Keystone.

After ruling in favor of Ellis, the district court deconsolidated Ellis’

negligent misrepresentation claim from the FDIC’s claims against

3Ellis signed a two-year contract at a base salary of $375,000, plus

benefits including the use of a corporate vehicle and a country club membership. He also purchased $49,500 in Keystone stock. 

8 ELLIS v. GRANT THORNTON LLP
Grant Thornton and entered judgment in favor of Ellis in the amount

of $2,419,233. Grant Thornton noted a timely appeal. 

II

On appeal from a bench trial, we may set aside the district court’s

findings of fact only if they are clearly erroneous. Minyard Enter.,

Inc. v. Southeastern Chem. & Solvent Co., 184 F.3d 373, 380 (4th Cir.

1999); Fed. R. Civ. P. 52(a). In determining whether a finding of fact

is clearly erroneous, we must give due regard to the opportunity of the

district court to judge the credibility of the witnesses. Fed. R. Civ. P.

52(a). A finding of fact is clearly erroneous when, "although there is

evidence to support it, the reviewing court on the entire evidence is

left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364,

395 (1948). 

As a federal court sitting in diversity, we have an obligation to

apply the jurisprudence of West Virginia’s highest court, the Supreme

Court of Appeals of West Virginia. Wells v. Liddy, 186 F.3d 505,

527-28 (4th Cir. 1999). In a situation where the state’s highest court

has spoken neither directly nor indirectly on the particular issue

before us, we are called upon to predict how that court would rule if

presented with the issue. Id. In this case, we are called upon to predict

whether, under the facts of this case, Grant Thornton owed Ellis a

duty of care under the West Virginia law of misrepresentation. 

In Bank of Bluefield, the Supreme Court of Appeals of West Virginia addressed the question of whether the lack of privity of contract

between an accountant and a bank was a complete defense to the

bank’s suit against the accountant for professional negligence in preparing a financial statement. 386 S.E.2d at 310-11. The court

answered that question in the negative. Id. at 315. In Bank of Bluefield, the bank alleged that the accountant had been professionally

negligent in preparing a financial statement for a construction company upon which the bank had relied in determining whether to give

the construction company a loan. The parties stipulated that: (1) the

bank informed the accountant that it would need the financial statement prior to the October 5, 1984 closing of the loan; (2) the financial

statement was delivered to the bank before the closing date; (3) the

ELLIS v. GRANT THORNTON LLP 9
bank alleged that it reasonably relied on the financial statement in

making the loan to the construction company; and (4) there was no

privity of contract between the bank and the accountant. The state

trial court in Bank of Bluefield held that, in the absence of contractual

privity between the parties, the bank could not recover from the

accountant. Id. at 311. 

In resolving the issue before it, the court in Bank of Bluefield discussed the four approaches to resolving the question of under what

circumstances an accountant can be liable to third parties for a negligent misrepresentation. Id. at 311-13. The first of these approaches

was announced in Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y.

1931), which held that negligence actions were only permitted by parties in privity of contract or in a situation so close as to approach that

of privity. Id. at 182-83. The second approach was also developed by

the New York Court of Appeals, which slightly modified the Ultramares Corp. approach in 1985. See Credit Alliance Corp. v. Arthur

Andersen & Co., 483 N.E.2d 110 (N.Y. 1985) (relaxing the strict

Ultramares Corp. privity doctrine by requiring a relationship "sufficiently approaching privity").4

 The third approach is set forth in § 552

of the Restatement (Second) of Torts. Under this approach, a person

or a limited class of persons who the auditor can foresee as parties

who will (and do) rely upon financial statements are allowed to

recover. Restatement (Second) of Torts § 552(1)-(2). The fourth

approach is the reasonably foreseeable approach, which permits all

parties who are reasonably foreseeable recipients of financial statements for business purposes to recover as long as they rely on the

4Credit Alliance Corp. announced the following three-prong test for

determining whether an accountant can be held liable for negligence to

a third party who has detrimentally relied on inaccurate financial statements: (1) the accountant must have been aware that the financial reports

were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3)

there must have been some conduct on the part of the accountant linking

him to that party or parties, which evinces the accountant’s understanding of that party or parties’ reliance. 483 N.E.2d at 118. The Credit Alliance Corp. approach is often referred to as the "near-privity" approach.

First Nat’l Bank of Commerce v. Monco Agency, Inc., 911 F.2d 1053,

1058 (5th Cir. 1990). 

10 ELLIS v. GRANT THORNTON LLP
statements for those business purposes. See, e.g., H. Rosenblum, Inc.

v. Adler, 461 A.2d 138, 142-46 (N.J. 1983).5

After summarizing these four approaches, the court in Bank of

Bluefield adopted the Restatement § 552 approach for West Virginia,

finding that the rule stated therein was "more appropriate because it

imposes a standard of care only to known users who will actually be

relying on the information provided by the accountant." 386 S.E.2d

at 313; see also id. at 310 Syllabus of the Court ("In the absence of

privity of contract, an accountant is liable for the negligent preparation of a financial report only to those he knows will be receiving and

relying on the report.").6 In view of the court’s adoption of the

Restatement approach in Bank of Bluefield, the court answered the

certified question—was privity a defense—in the negative. Id. at 315.

Consequently, other than the adoption of the Restatement approach,

5Although it is sometimes difficult to discern the differences between

the four approaches, appropriate lines can be drawn between the restrictive Ultramares Corp., Credit Alliance Corp., and Restatement

approaches and the nonrestrictive foreseeability approach. For example,

although the Restatement’s approach expands liability to a larger potential class of third parties than do the Ultramares Corp. and Credit Alliance Corp. approaches, it does not extend liability beyond an identified

third party, a known third party, or third parties who enter into the same

type of transaction as originally contemplated. In other words, under the

Ultramares Corp. and Credit Alliance Corp. approaches, "the precise

identity of the informational consumer [must] be foreseen by the auditor," Monco Agency, Inc., 911 F.2d at 1059, but, under the Restatement

approach, the precise "informational consumer" need not be known, id.;

rather the Restatement approach "contemplates identification of a narrow

group, not necessarily the specific membership within that group." Id.

Moreover, unlike the foreseeability approach, the Restatement approach

does not extend to "every reasonably foreseeable consumer of financial

information." Id. at 1060. 

6We note that the Bank of Bluefield court did not identify what constitutes a "known" user, the definition of which is important to separate the

third parties entitled to recover under the Restatement approach and not

entitled to recover under the Ultramares Corp. and Credit Alliance Corp.

approaches. Such a demarcation, however, was not essential to the Bank

of Bluefield court’s rejection of these approaches, so its failure to employ

precise cabining language is understandable. 

ELLIS v. GRANT THORNTON LLP 11
the Bank of Bluefield court gave no further meaningful guidance concerning under what circumstances an accountant can be liable to third

parties for negligent misrepresentations under § 552. 

Restatement (Second) of Torts § 552 provides in relevant part:

(1) One who, in the course of his business, profession or

employment, or in any other transaction in which he has a

pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable

reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the

information. 

(2) [T]he liability stated in Subsection (1) is limited to loss

suffered 

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to

supply the information or knows that the recipient

intends to supply it; and 

(b) through reliance upon it in a transaction that he

intends the information to influence or knows that

the recipient so intends or in a substantially similar

transaction. 

Restatement (Second) of Torts § 552(1)-(2). The Restatement

approach is deliberately restrictive to encourage the free flow of commercial information. See id. § 552, cmt. ("By limiting the liability for

negligence of a supplier of information to be used in commercial

transactions to cases in which he manifests an intent to supply the

information for the sort of use in which the plaintiff’s loss occurs, the

law promotes the important social policy of encouraging the flow of

commercial information upon which the operation of the economy

rests."). It also seeks to protect suppliers of commercial information

from liability in instances in which they oblige themselves to provide

information but the terms of the obligation are unknown to them. See

12 ELLIS v. GRANT THORNTON LLP
id. ("A user of commercial information cannot reasonably expect its

maker to have undertaken to satisfy this obligation unless the terms

of the obligation were known to him."). 

Although the West Virginia Supreme Court of Appeals in Bank of

Bluefield did not set forth what must be proven by an injured third

party proceeding under § 552 against an accountant for the accountant’s negligent misrepresentations, other courts have set forth six elements that essentially track the language of the Restatement. See, e.g.,

N. Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35, 41-42 (1st Cir.

2001) (setting forth six elements). Under this authority, a finding of

liability requires the injured party to prove (1) inaccurate information,

(2) negligently supplied, (3) in the course of an accountant’s professional endeavors, (4) to a third person or limited group of third persons for whose benefit and guidance the accountant actually intends

or knows will receive the information, (5) for a transaction (or for a

substantially similar transaction) that the accountant actually intends

to influence or knows that the recipient so intends, (6) with the result

that the third party justifiably relies on such misinformation to his detriment. Id. The third party has the burden of proving each of these

elements. Id. at 42. Moreover, the accountant’s "actual knowledge . . .

should be ascertained at the time the audit report or financial statement is issued." Id. at 39, 42. 

In this case, the record simply is devoid of evidence suggesting that

Ellis proved the fourth, fifth, and sixth elements. With regard to the

fourth element, it is clear that Ellis failed to show that Grant Thornton

knew (or intended) that potential employees, like Ellis, were intended

to receive the audit report for their benefit and guidance. The audit

report was delivered to the board of directors of Keystone. The audit

report plainly states that the audit report was not intended for use by

third parties. Rather, the audit report was prepared for the benefit of

Keystone and the OCC, which is entirely consistent with the agreements between Keystone and the OCC and between Keystone and

Grant Thornton. Thus, Ellis, or any other potential employee, was not

a member of any limited group of persons for whose benefit the audit

report was prepared. 

Perhaps recognizing the tenuousness of relying on the audit report

itself, especially since he signed his employment contract a week after

ELLIS v. GRANT THORNTON LLP 13
the audit report was issued to the board, Ellis relies heavily on Quay’s

statements in March 1999 indicating that Grant Thornton was going

to give Keystone a clean audit opinion.7 Of course, reliance on Quay’s

statements improves the position of Ellis, as Quay’s statements did

not include a disclaimer. However, the Restatement approach

instructs that we should assess cases in light of "[t]he ordinary practices and attitudes of the business world." Restatement (Second) of

Torts § 552, cmt. j. Viewed in this light, it is clear that Grant Thornton was Keystone’s auditor and was hired to conduct an audit for the

benefit of Keystone and the OCC. Grant Thornton was not hired to

go over with each potential employee the soundness of Keystone’s

financial condition. Indeed, throughout most of the course of the audit

report’s preparation, Ellis was an unknown, unidentified potential

employee of Keystone. Grant Thornton was not aware of the existence of the potential employment transaction between Ellis and Keystone until after Grant Thornton reached its decision to give Keystone

a clean audit opinion. If the scope of the audit involved potential

employees, one would expect at least some knowledge on the part of

Grant Thornton before they formed their audit opinion. 

Moreover, Quay first informed the board of directors on March 24,

1999 that Grant Thornton was going to give Keystone a clean audit

opinion. Thus, the clean audit opinion information was disclosed for

the benefit of Keystone’s board and not potential employees such as

Ellis. Ellis’ attempt at turning Quay’s clean audit opinion statements

into ones for his benefit, by virtue of his meetings with Quay, ignores

the business reality that Grant Thornton was hired and performed the

audit for the benefit of Keystone and the OCC. It also ignores the fact

that any release of information to Ellis was done at the behest of Keystone, not Grant Thornton. There is no evidence in the record to support the conclusion that Ellis was a member of any limited group of

persons for whose benefit Quay’s statements were made. 

7Grant Thornton claims that oral statements can never form the basis

of liability under § 552 when such statements are made before the release

of the final audit opinion. We need not decide this issue because, even

assuming as we do for purposes of this appeal that oral statements made

before the release of the final audit opinion can form the basis of auditor

liability under § 552, Ellis cannot prevail. 

14 ELLIS v. GRANT THORNTON LLP
Our conclusion concerning the fourth element is buttressed by

Illustration 10 in § 552. That illustration provides:

A, an independent public accountant, is retained by B Company to conduct an annual audit of the customary scope for

the corporation and to furnish his opinion on the corporation’s financial statements. A is not informed of any

intended use of the financial statements; but A knows that

the financial statements, accompanied by an auditor’s opinion, are customarily used in a wide variety of financial

transactions by the corporation and that they may be relied

upon by lenders, investors, shareholders, creditors, purchasers and the like, in numerous possible kinds of transactions.

In fact B Company uses the financial statements and accompanying auditor’s opinion to obtain a loan from X Bank.

Because of A’s negligence, he issues an unqualifiedly favorable opinion upon a balance sheet that materially misstates

the financial position of B Company, and through reliance

upon it X Bank suffers pecuniary loss. A is not liable to X

bank. 

Id. § 552, cmt. h, illus. 10. Illustration 10, we believe, is materially

indistinguishable from our case. Like the accountant in the illustration, Grant Thornton was not aware of an intended use of its audit

opinion beyond the customary business planning use of an audit opinion by a corporation such as Keystone and the use by the OCC for

oversight, as it was hired "to conduct an annual audit of the customary

scope for [Keystone] and to furnish [its] opinion on [Keystone’s]

financial statements." Id. Indeed, Grant Thornton was not aware that

any potential employee of Keystone was going to base their decision

to seek employment with Keystone on the outcome of the audit.

Rather, in performing its audit function, Grant Thornton was aware

that its audit opinion and any statements made leading up to the issuance of the audit opinion may be relied upon by shareholders, investors, and perhaps potential employees such as Ellis. However, more

than a tenuous awareness of this sort is required to impose liability

on Grant Thornton. To hold otherwise would transform the Restatement approach into the foreseeability approach, which the court in

Bank of Bluefield clearly rejected. Ellis was required to show that

Grant Thornton knew that its audit opinion would be used by KeyELLIS v. GRANT THORNTON LLP 15
stone to assist potential employees in making their decision concerning whether to come to work for Keystone. The record simply does

not demonstrate that Ellis made such a showing. 

With regard to the fifth element’s substantiality requirement, we

examine two questions. First, we examine, from the accountant’s

standpoint, what risks he reasonably perceived he was undertaking

when he delivered the challenged report or financial statement.

Lapalme, 258 F.3d at 41. If the accountant is unaware of a potential

risk, then liability cannot attach. Next, we make an objective comparison between the transaction to which the accountant had actual

knowledge and the transaction that in fact occurred. Id. This comparison cannot be hypertechnical, but, rather, must be conducted in light

of customary business world practices and attitudes. Restatement

(Second) of Torts § 552, cmt. j. "The goal of this inquiry is to determine whether the two transactions share essentially the same character. If so, the actual transaction is substantially similar to the

contemplated transaction (and, therefore, liability-inducing)."

Lapalme, 258 F.3d at 41. 

When Grant Thornton issued its audit report, it was not assuming

the risk that third parties would rely on the report. As noted above,

the report itself states that it is not to be used by third parties. To the

extent that Ellis relied on Quay’s statements, it cannot be said that

Grant Thornton was assuming the risk of being liable for Ellis’ future

lost earnings. The audit opinion was formed by the time Quay met

with Ellis, and Quay was simply repeating information that was earlier disclosed to the Keystone board in his presence. 

With regard to the objective comparison, the liability of the maker

of a negligent misrepresentation extends "to all transactions of the

type or kind that the maker intends or has reason to expect." Restatement (Second) of Torts § 552, cmt. j. For example, "independent public accountants who negligently make an audit of books of a

corporation, which they are told is to be used only for the purpose of

obtaining a particular line of banking credit, are not subject to liability

to a wholesale merchant whom the corporation induces to supply it

with goods on credit by showing him the financial statements and the

accountant’s opinion." Id. Moreover, an accountant who negligently

conducts an audit for A corporation knowing that A corporation is

16 ELLIS v. GRANT THORNTON LLP
going to show the audit to B corporation as a basis for the extension

of credit from B corporation is not liable to B corporation if B corporation buys a controlling interest in A corporation in reliance upon the

audit. Id. § 552, cmt. j, illus. 14. Thus, when the character of the

transaction materially changes, there is no liability. See Lapalme, 258

F.3d at 44 ("Even if the change involves a new transaction, rather

than merely a modification of the earlier (known) transaction, the

accounting firm might still be held liable if the identity of the third

party is unchanged, the type of transaction pretty much the same, and

the firm’s exposure relatively constant."). 

Here, Grant Thornton was hired to conduct an audit of Keystone.

It was aware at the time it was hired and during the auditing process

that the audit was being done for the benefit of Keystone and the

OCC. It was not aware during this process that its audit was being

performed for the benefit of potential employees of Keystone. Indeed,

there simply is no evidence in the record that Grant Thornton cared

one way or the other who Keystone hired or whether Ellis became

president of Keystone. In fact, Ellis was not even on the radar screen

until after Grant Thornton concluded that it was going to issue Keystone a clean audit opinion. Moreover, any release of information to

Ellis was done at the behest of Keystone, not Grant Thornton. This

fact further suggests that Grant Thornton never intended to deviate

from its standard auditing functions. In short, to find the fifth element

satisfied, we would have to materially change the transaction from an

audit undertaken to benefit Keystone and the OCC to one intended to

benefit potential employees of Keystone. Such a material change to

the nature of the transaction is prohibited under the Restatement

approach. 

Ellis fares no better on the sixth element. Unquestionably, given

that the audit report stated that it was not intended for use by third

parties, Ellis could not justifiably rely on the audit report in signing

his employment contract with Keystone. With regard to Quay’s oral

assurances, likewise, Ellis could not justifiably rely on those statements. First, Ellis was aware at the time he signed his employment

contract that the audit report was not to be used by third parties. A

person as sophisticated and experienced in the banking business as

Ellis is, he knew he could not justifiably rely on Quay’s statements

when the report itself stated otherwise. Moreover, as previously

ELLIS v. GRANT THORNTON LLP 17
noted, Quay’s statements concerning the clean audit opinion were

offered by Quay to the board and the shareholders to apprise the

board and the OCC of Keystone’s financial condition. They were not

offered to induce individuals to accept employment with Keystone.

As such, it is difficult to discern how an individual as sophisticated

and experienced as Ellis would justifiably rely on this information in

accepting a job at Keystone. 

III

For the reasons stated herein, the judgment of the district court is

reversed.

REVERSED

18 ELLIS v. GRANT THORNTON LLP