Opinion ID: 1348772
Heading Depth: 3
Heading Rank: 3

Heading: The Accountant's Conduct Is Closely Connected to the Injury Suffered

Text: To recover damages for an accountant's negligence in rendering an unqualified audit opinion, a plaintiff must prove both reliance on the audit opinion and a factual nexus between the plaintiff's loss and the undisclosed defects in the audited financial statements. To establish reliance, the third party must prove that it reviewed the client's financial statements, that the statements contained material errors or omissions, that it would not have entered into a business transaction with the client (as investor, lender, supplier, etc.) had the financial statements revealed the true facts, and that it would not have accepted the client's financial statements at face value had the accountant not endorsed them with an unqualified audit opinion. To establish the required factual nexus, the plaintiff must show that the loss was a foreseeable result of the fact or condition that the financial statements misrepresented or concealed. (See Restat.2d Torts (1977) § 548A, com. b.) When the third party has demonstrated causation in this manner, showing that the accountant's opinion played an essential role in the third party's business decision and its resulting loss, the connection between the auditor's negligence and the third party's injury must be judged close by any reasonable measure. The majority does not dispute that when reliance exists, the accountant's negligence is closely connected to the third party's resulting injury. Rather, the majority implies that reliance is easily feigned, and that false claims of reliance are difficult to disprove. (Maj. opn., ante, pp. 400-401.) Thus, the majority asserts that juries will be deceived into awarding substantial damages to plaintiffs who did not rely at all on the audit report, or for whom the audit report was only a minor and insignificant factor in the decision to lend to or invest in the client. The majority's concern is unwarranted. As noted, an independent auditor's report invites and produces reliance. Businesses retain accountants to audit their financial statements because they know that audit reports are effective in inducing investors to invest and lenders to lend. If audit reports were not a substantial factor in the decisions of investors and lenders, businesses would have little need for independent auditing services. Thus, accountants can hardly argue that third party reliance is anything other than a routine and predictable response. Claims of actual reliance are more likely to be genuine than feigned. Because the plaintiff must show that reliance was reasonable, an accountant is not defenseless when faced with a claim of reliance that is dubious under the circumstances of the particular case. By means of expert testimony that a reasonable investor or lender would not have relied on the accountant's opinion under the same circumstances, the accountant can rebut the claim of reliance. The supposed problem of feigned reliance claims differs neither in degree nor in kind from the many other credibility issues routinely resolved by triers of fact in civil litigation. It cannot justify a blanket rule of nonliability that would preclude compensation for genuine injuries caused by negligence in auditing. Some words of the United States Supreme Court are appropriately recalled here. Rejecting an argument similar to that made by the majority, the court said: Petitioner's entire argument ... is founded on the premise that the jury will not be able to separate the wheat from the chaff. We do not share in this low evaluation of the adversary process. ( Barefoot v. Estelle (1983) 463 U.S. 880, 901, fn. 7 [77 L.Ed.2d 1090, 103 S.Ct. 3383].)