Opinion ID: 1348772
Heading Depth: 3
Heading Rank: 4

Heading: Moral Blame Is Comparable to Other Actionable Professional Negligence

Text: As independent auditor of a business's financial statements, an accountant assumes a moral responsibility to third parties who may be expected to rely on the audit report. Courts and commentators have long recognized this moral obligation: `The certified public accountant acknowledges a moral responsibility (and under the Securities Act this is made a legal and financial responsibility) to be as mindful of the interests of strangers who may rely on his [or her] opinion as of the interests of the client who pays his [or her] fee. [ś] ... The certified public accountant, therefore, in providing accounting statements which all concerned may accept as disinterested expressions, based on technically sound procedures and experienced judgment, may serve as a kind of arbiter, interpreter, and umpire among all the varied interests. Thereby he [or she] can eliminate the necessity for costly separate investigations by each party at interest, as well as endless doubts, delays, misunderstandings, and controversies which are so much sand in the economic machine.' ( Rosenblum v. Adler (1983) 93 N.J. 324 [461 A.2d 138, 150, 35 A.L.R. 4th 199], quoting Carey, Professional Ethics of Public Accounting (1946) pp. 13-14.) The United States Supreme Court, in refusing to recognize an accountant-client privilege for tax accrual workpapers, described the accountant's responsibility in these terms: By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This `public watchdog' function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. ( United States v. Arthur Young & Co. (1984) 465 U.S. 805, 817-818 [79 L.Ed.2d 826, 835-837, 104 S.Ct. 1495], italics in original.) The Securities and Exchange Commission expressed the same view some 35 years ago: `The responsibility of a public accountant is not only to the client who pays his [or her] fee, but also to investors, creditors and others who may rely on the financial statements which he [or she] certifies.' ( Rosenblum v. Adler, supra, 93 N.J. 324 [461 A.2d 138, 149], quoting In re Touche, Niven, Bailey & Smart (1957) 37 S.E.C. 629, 670.) Accountants themselves do not dispute or disclaim their ethical obligation to third party users of audit opinions: A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession's public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on certified public accountants. (2 American Institute of Certified Public Accountants, Prof. Standards (CCH 1988) § 53.01.) Because an accountant's moral, ethical, and professional responsibilities extend to foreseeable users of audit opinions, such as lenders and investors, an accountant whose carelessness causes economic loss to a foreseeable user is as morally blameworthy as an attorney who negligently drafts a will or contract, or a broker or escrow holder who negligently mishandles important documents in a real estate transaction. In each instance, the breach of a professional responsibility through lack of due care should result in liability to those to whom the professional owes an established moral and ethical obligation. Although defendant and the majority advance various arguments against this conclusion, none is persuasive. Defendant argues that accounting is more art than science, that it requires the exercise of professional judgment, and that even the most carefully performed audit cannot guarantee that the audited financial statements are entirely free of error. From this, defendant would have this court conclude that little if any moral blame attaches when an accountant fails to detect errors in a client's financial statements. Defendant's argument proceeds from a faulty premise. It incorrectly assumes that an accountant will be liable for negligence whenever an audit fails to uncover a material mistake in a financial statement. No such strict liability is at issue. On the contrary, accountants are held only to the standards of their profession: The auditor is neither required to investigate every supporting document, nor deemed to have the training or skills of a lawyer or criminal investigator. ( Rosenblum v. Adler, supra, 93 N.J. 324 [461 A.2d 138, 148].) The law fully recognizes that, just as an attorney does not guarantee a client's success in litigation, nor a doctor a patient's complete recovery from sickness or injury, an accountant performing an audit does not guarantee the accuracy of the client's financial statements. ( International Mortgage Co. v. John P. Butler Accountancy Corp., supra, 177 Cal. App.3d 806, 818.) Negligence liability results only when the accountant has failed to meet the standards of the accounting profession. More specifically, an accountant performing an audit is subjected to negligence liability only upon proof of a failure to perform a reasonably careful audit according to generally accepted auditing standards. When such a breach of due care has been proven, the accountant's conduct is morally blameworthy to the same extent as other forms of professional malpractice for which negligence liability is routinely imposed. (See, e.g., Burgess v. Superior Court, supra, 2 Cal.4th 1064, 1081.) The majority maintains that in cases like this one it is wrong to impose liability on an accountant for failing to detect errors in financial statements, because the accountant's wrongdoing is slight when compared to that of the client who committed the errors in the first instance. If the client is more at fault than the accountant, this greater fault is relevant in an action by the accountant against the client for indemnity, but it provides no reason to absolve the negligent accountant from liability to third parties. When the client is not a party to the lawsuit, and the only question is whether a loss should fall on the negligent accountant or on a third party who reasonably and foreseeably relied on the accountant's integrity and professional skill, considerations of relative moral fault necessarily require placing the loss on the party whose use of care could have prevented it, rather than on a wholly innocent victim. (See Iselin-Jefferson Financial Co. v. United California Bank (1976) 16 Cal.3d 886, 890-892 [129 Cal. Rptr. 670, 549 P.2d 142] [holding notary public who negligently acknowledged a forged signature on a guarantee agreement liable to a purchaser of accounts receivable who relied on the notarization]; see also, Civ. Code, § 3543 [Where one of two innocent persons must suffer by the act of a third, he [or she], by whose negligence it happened, must be the sufferer.].) The majority asserts that holding negligent accountants liable to foreseeable users of audit opinions will subject accountants to a claim for all sums of money ever loaned to or invested in the client (maj. opn., ante, p. 400), and result in vast numbers of suits and limitless financial exposure ( ibid. ). The majority uses such assertions to justify its claim that liability to foreseeable users of audit opinions would be out of proportion to fault. The majority's characterizations of the scope of the liability that until now has existed in this state are gross exaggerations, yet typical of the hyperbole that seems to infect any debate of accountants' negligence liability to third parties. Such liability is indeterminate (like virtually all other forms of tort liability), but it is not limitless. Because liability has extended only to those business transactions conducted in reliance on the audited financial statements, and because audited financial statements become obsolete within a few years at most, the accountant's liability exposure has been finite and reasonably predictable in duration. Liability continues only so long as the audited financial statements reasonably influence business decisions. The amount of the potential liability is also measurable. Because it depends on the client's investment and borrowing potential, the scope of liability is necessarily proportional to the size and growth rate of the audited business. These boundaries of time and amount mark the outer limits of accountant liability for negligence in auditing. Within those limits, a negligent accountant will be liable for only a fraction of the money invested in or lent to the client. No liability ensues absent reliance, and, as the majority states, the ultimate decision to lend or invest is often based on numerous business factors that have little to do with the audit report. (Maj. opn., ante, p. 401.) A bank's decision to make a fully secured loan, for instance, may be little influenced by financial statement inaccuracies having no bearing on the security's value. In such cases, the necessary element of causation will be lacking, and the accountant will not be liable. The factor of moral blame, I conclude, supports a rule that makes a negligent accountant liable to an innocent third party for economic losses resulting from the third party's reasonable and foreseeable reliance on the negligent accountant's audit opinion.