Opinion ID: 1348772
Heading Depth: 3
Heading Rank: 1

Heading: Harm to Third Persons Is Foreseeable

Text: Why do corporations have their financial statements audited by certified public accountants? Although corporations find audit reports useful as a check on their internal accounting procedures, this is not the sole or even the primary purpose for which most corporate businesses now obtain audit reports. As the majority itself acknowledges, audit reports are very frequently (if not almost universally) used by businesses to establish the financial credibility of their enterprises in the perceptions of outside persons, e.g., existing and prospective investors, financial institutions, and others who extend credit to an enterprise or make risk-oriented decisions based on its economic viability. (Maj. opn., ante, p. 382.) Defendant in this case does not plead ignorance of the common uses for the audit reports it prepares. As one of the nation's largest accounting firms, and a prominent member of the business community in its own right, defendant knows that its work product gives the client's financial statements an essential measure of credibility in the eyes of those individuals and entities who, in dealings with the client, must make business decisions based on an assessment of the client's financial position. Defendant knows, in brief, that audit reports invite and produce reliance, and that injury results when reliance proves unjustified. Because the normal and common uses of audit reports are well known throughout the business community, an accountant can readily foresee that negligence in the conduct of the audit or the preparation of the audit report will result in harm to individuals and corporations that receive the report and rely on it in their business dealings with the client. As neither the majority nor defendant disputes the foreseeability of harm to relying third parties, this point need not be belabored. But neither should it be slighted. As this court has stressed, foreseeability of harm is the most important of the policy considerations governing negligence liability. ( Tarasoff v. Regents of University of California, supra, 17 Cal.3d 425, 434; see also J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 806 [157 Cal. Rptr. 407, 598 P.2d 60] [... this court has focused on foreseeability as the key component necessary to establish liability....].)