Opinion ID: 1348772
Heading Depth: 1
Heading Rank: 5

Heading: Analysis of Auditor's Liability to Third Persons for Audit Opinions

Text: Every person is bound, without contract, to abstain from injuring the person or property of another, or infringing upon any of his rights. (Civ. Code, § 1708; all further statutory references are to this code unless otherwise indicated.) Civil liability for injury to others is imposed based on causes of action in tort, which include, insofar as relevant to this case: negligence, negligent misrepresentation, and fraud.
(2) [N]egligence is conduct which falls below the standard established by law for the protection of others. (Rest.2d Torts, § 282.) Every one is responsible, not only for the result of his willful acts, but also for an injury occasioned to another by his want of ordinary care or skill in the management of his property or person, except so far as the latter has, willfully or by want of ordinary care, brought the injury upon himself. (§ 1714, subd. (a).) The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion. (Rest.2d Torts, § 281, subd. (a); 6 Witkin, Summary of Cal. Law (9th ed. 1988), Torts, § 732, p. 60.) Whether this essential prerequisite to a negligence cause of action has been satisfied in a particular case is a question of law to be resolved by the court. (6 Witkin, supra, § 748 at p. 83.) A judicial conclusion that a duty is present or absent is merely `a shorthand statement ... rather than an aid to analysis.... [D]uty, is not sacrosanct in itself, but only an expression of the sum total of those considerations of policy which lead the law to say that the particular plaintiff is entitled to protection.' ( Dillon v. Legg (1968) 68 Cal.2d 728, 734 [69 Cal. Rptr. 72, 441 P.2d 912, 29 A.L.R.3d 1316], quoting Prosser, Law of Torts (3d ed.) pp. 332-333.) Courts, however, have invoked the concept of duty to limit generally `the otherwise potentially infinite liability which would follow from every negligent act....' ( Thompson v. County of Alameda (1980) 27 Cal.3d 741, 750 [167 Cal. Rptr. 70, 614 P.2d 728, 12 A.L.R.4th 701], quoting Dillon, supra, 68 Cal.2d at p. 739.) We have employed a checklist of factors to consider in assessing legal duty in the absence of privity of contract between a plaintiff and a defendant. In Biakanja v. Irving (1958) 49 Cal.2d 647 [320 P.2d 16, 65 A.L.R.2d 1358], a notary public undertook to prepare a will for the decedent and then negligently failed to have it properly attested. We allowed the decedent's brother, the sole beneficiary under the will, to recover from the notary public. (3a) In permitting negligence liability to be imposed in the absence of privity, we outlined the factors to be considered in making such a decision: The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.... Here, the `end and aim' of the transaction was to provide for the passing of [the] estate to plaintiff.... Defendant must have been aware from the terms of the will itself that, if faulty solemnization caused the will to be invalid, plaintiff would suffer the very loss which occurred. As [decedent] died without revoking his will, plaintiff, but for defendant's negligence, would have received all of the ... estate, and the fact that she received only one-eighth of the estate was directly caused by defendant's conduct. ( Id. at pp. 650-651.) (4a) Viewing the problem before us in light of the factors set forth above, we decline to permit all merely foreseeable third party users of audit reports to sue the auditor on a theory of professional negligence. Our holding is premised on three central concerns: (1) Given the secondary watchdog role of the auditor, the complexity of the professional opinions rendered in audit reports, and the difficult and potentially tenuous causal relationships between audit reports and economic losses from investment and credit decisions, the auditor exposed to negligence claims from all foreseeable third parties faces potential liability far out of proportion to its fault; (2) the generally more sophisticated class of plaintiffs in auditor liability cases (e.g., business lenders and investors) permits the effective use of contract rather than tort liability to control and adjust the relevant risks through private ordering; and (3) the asserted advantages of more accurate auditing and more efficient loss spreading relied upon by those who advocate a pure foreseeability approach are unlikely to occur; indeed, dislocations of resources, including increased expense and decreased availability of auditing services in some sectors of the economy, are more probable consequences of expanded liability. In a broad sense, economic injury to lenders, investors, and others who may read and rely on audit reports is certainly foreseeable. Foreseeability of injury, however, is but one factor to be considered in the imposition of negligence liability. Even when foreseeability was present, we have on several recent occasions declined to allow recovery on a negligence theory when damage awards threatened to impose liability out of proportion to fault or to promote virtually unlimited responsibility for intangible injury. In placing explicit limits on recovery for negligent infliction of emotional distress by accident bystanders, we commented: `[F]oreseeability' ... `is endless because [it], like light, travels indefinitely in a vacuum.' ( Thing v. La Chusa (1989) 48 Cal.3d 644, 659 [257 Cal. Rptr. 865, 771 P.2d 814].) `[It] proves too much.... Although it may set tolerable limits for most types of physical harm, it provides virtually no limit on liability for nonphysical harm.' ... It is apparent that reliance on foreseeability of injury alone in finding a duty, and thus a right to recover, is not adequate when the damages sought are for an intangible injury. In order to avoid limitless liability out of all proportion to the degree of a defendant's negligence, and against which it is impossible to insure without imposing unacceptable costs on those among whom the risk is spread, the right to recover for negligently caused emotional distress must be limited. ( Id. at pp. 663-664, citations omitted.) Emphasizing the important role of policy factors in determining negligence, we observed that there are clear judicial days on which a court can foresee forever and thus determine liability but none on which that foresight alone provides a socially and judicially acceptable limit on recovery of damages for [an] injury. ( Thing v. LaChusa, supra, 48 Cal.3d at p. 668; see also Nally v. Grace Community Church (1988) 47 Cal.3d 278, 297 [253 Cal. Rptr. 97, 763 P.2d 948] [Mere foreseeability of the harm or knowledge of the danger, is insufficient to create a legally cognizable special relationship giving rise to a legal duty to prevent harm.]; Elden v. Sheldon (1988) 46 Cal.3d 267, 274 [250 Cal. Rptr. 254, 758 P.2d 582] [[P]olicy considerations may dictate a cause of action should not be sanctioned no matter how foreseeable the risk ... for the sound reason that the consequences of a negligent act must be limited in order to avoid an intolerable burden on society.].) In line with our recent decisions, we will not treat the mere presence of a foreseeable risk of injury to third persons as sufficient, standing alone, to impose liability for negligent conduct. We must consider other pertinent factors.
An auditor is a watchdog, not a bloodhound. ( In re Kingston Cotton Mill Co. (1896) 2 Ch. 279, 288.) As a matter of commercial reality, audits are performed in a client-controlled environment. The client typically prepares its own financial statements; it has direct control over and assumes primary responsibility for their contents. (See In re Interstate Hosiery Mills, Inc. (1939) 4 S.E.C. 721 [The fundamental and primary responsibility for the accuracy [of financial statements] rests upon management.].) The client engages the auditor, pays for the audit, and communicates with audit personnel throughout the engagement. Because the auditor cannot in the time available become an expert in the client's business and record-keeping systems, the client necessarily furnishes the information base for the audit. The client, of course, has interests in the audit that may not be consonant with those of the public. Management seeks to maximize the stockholders' and creditors' confidence in the company, within the bounds of [GAAP and GAAS]; whereas, the public demands a sober and impartial evaluation of fiscal performance. ( First Nat. Bank of Commerce v. Monco Agency Inc., supra, 911 F.2d at p. 1058.) Client control also predominates in the dissemination of the audit report. Once the report reaches the client, the extent of its distribution and the communications that accompany it are within the exclusive province of client management. Thus, regardless of the efforts of the auditor, the client retains effective primary control of the financial reporting process. Moreover, an audit report is not a simple statement of verifiable fact that, like the weight of the load of beans in Glanzer v. Shepherd, supra, 135 N.E. 275, can be easily checked against uniform standards of indisputable accuracy. Rather, an audit report is a professional opinion based on numerous and complex factors. As discussed in part II above, the report is based on the auditor's interpretation and application of hundreds of professional standards, many of which are broadly phrased and readily subject to different constructions. Although ultimately expressed in shorthand form, the report is the final product of a complex process involving discretion and judgment on the part of the auditor at every stage. Using different initial assumptions and approaches, different sampling techniques, and the wisdom of 20-20 hindsight, few CPA audits would be immune from criticism. (Siliciano, supra, 86 Mich.L. Rev. at p. 1956, fn. 137.) Although the auditor's role in the financial reporting process is secondary and the subject of complex professional judgment, the liability it faces in a negligence suit by a third party is primary and personal and can be massive. The client, its promoters, and its managers have generally left the scene, headed in most cases for government-supervised liquidation or the bankruptcy court. The auditor has now assumed center stage as the remaining solvent defendant and is faced with a claim for all sums of money ever loaned to or invested in the client. Yet the auditor may never have been aware of the existence, let alone the nature or scope, of the third party transaction that resulted in the claim. The character of the damages claimed from the auditor â economic loss resulting from investment and credit decisions â introduces further uncertainties into the negligence suit against the auditor. An award of damages for pure economic loss suffered by third parties raises the spectre of vast numbers of suits and limitless financial exposure. [11] Investment and credit decisions are by their nature complex and multifaceted. Although an audit report might play a role in such decisions, reasonable and prudent investors and lenders will dig far deeper in their due diligence investigations than the surface level of an auditor's opinion. And, particularly in financially large transactions, the ultimate decision to lend or invest is often based on numerous business factors that have little to do with the audit report. The auditing CPA has no expertise in or control over the products or services of its clients or their markets; it does not choose the client's executives or make its business decisions; yet, when clients fail financially, the CPA auditor is a prime target in litigation claiming investor and creditor economic losses because it is the only available (and solvent) entity that had any direct contact with the client's business affairs. (Siliciano, supra, 86 Mich.L.Rev. at pp. 1932-1933.) The facts of this case provide an apt example. Although plaintiffs now profess reliance on Arthur Young's audit report as the sine qua non of their investments, the record reveals a more complicated decisionmaking process. As a group of corporate insiders and venture capitalists who were closely following the Cinderella-like transformation of the company, plaintiffs perceived an opportunity to make a large sum of money in a very short time by investing in a company they believed would (literally within months) become the dominant force in the new personal computer market. Although hindsight suggests they misjudged a number of major factors (including, at a minimum, the product, the market, the competition, and the company's manufacturing capacity), plaintiffs' litigation-focused attention is now exclusively on the auditor and its report. Plaintiffs would have us believe that, had the Arthur Young report disclosed deficiencies in accounting controls and the $3 million loss (on income of over $68 million), they would have ignored all the other positive factors that triggered their interest (such as the company's rapid growth in sales, its dynamic management, and the intense interest of underwriters in a public offering) and flatly withheld all their funds. (3b)(See fn. 12.) Plaintiffs' revisionist view of the company's history, the audit, and their own investments, suggests something less than a close connection between Arthur Young's audit report and the loss of their invested funds. ( Biakanja v. Irving, supra, 49 Cal.2d at p. 650.) [12] (4b) In view of the factors discussed above, judicial endorsement of third party negligence suits against auditors limited only by the concept of forseeability raises the spectre of multibillion-dollar professional liability that is distinctly out of proportion to: (1) the fault of the auditor (which is necessarily secondary and may be based on complex differences of professional opinion); and (2) the connection between the auditor's conduct and the third party's injury (which will often be attenuated by unrelated business factors that underlie investment and credit decisions). As other courts and commentators have noted, such disproportionate liability cannot fairly be justified on moral, ethical, or economic grounds. (Siliciano, supra, 86 Mich.L.Rev. at pp. 1944-1945 and cases cited therein; Gormley, supra, 14 Seton Hall L.Rev. at pp. 552-553.) As one commentator has summarized: The most persuasive basis for maintaining the limited duty [of auditors] is a proportionality argument.... It can be argued as a general proposition in these cases that the wrongdoing of an accountant is slight compared with that of the party who has deceived him (his client) as well as the plaintiff. This rationale for nonliability is similar to the proximate cause grounds on which willful intervening misconduct insulates a `merely negligent' party from liability. (Rabin, supra, 37 Stan.L.Rev. at pp. 1536-1537, fn. 74.)
Courts advocating unlimited auditor liability to all foreseeably injured third parties often analogize the auditor's opinion to a consumer product, arguing that the demise of privity as a barrier to recovery for negligence in product manufacture implies its irrelevance in the area of auditor liability as well. (See, e.g., Rosenblum v. Adler, supra, 461 A.2d at pp. 145-147.) Plaintiffs advance similar arguments. The analogy lacks persuasive force for two reasons. Initially, as noted above, the maker of a consumer product has complete control over the design and manufacture of its product; in contrast, the auditor merely expresses an opinion about its client's financial statements â the client is primarily responsible for the content of those statements in the form they reach the third party. Moreover, the general character of the class of third parties is also different. Investors, creditors, and others who read and rely on audit reports and financial statements are not the equivalent of ordinary consumers. Like plaintiffs here, they often possess considerable sophistication in analyzing financial information and are aware from training and experience of the limits of an audit report product that is, at bottom, simply a broadly phrased professional opinion based on a necessarily confined examination. In contrast to the presumptively powerless consumer in product liability cases, the third party in an audit negligence case has other options â he or she can privately order the risk of inaccurate financial reporting by contractual arrangements with the client. (Siliciano, supra, 86 Mich.L.Rev. at pp. 1956-1957.) For example, a third party might expend its own resources to verify the client's financial statements or selected portions of them that were particularly material to its transaction with the client. Or it might commission its own audit or investigation, thus establishing privity between itself and an auditor or investigator to whom it could look for protection. In addition, it might bargain with the client for special security or improved terms in a credit or investment transaction. Finally, the third party could seek to bring itself within the Glanzer exception to Ultramares by insisting that an audit be conducted on its behalf or establishing direct communications with the auditor with respect to its transaction with the client. (Siliciano, supra, 86 Mich.L.Rev. at pp. 1956-1957.) As a matter of economic and social policy, third parties should be encouraged to rely on their own prudence, diligence, and contracting power, as well as other informational tools. This kind of self-reliance promotes sound investment and credit practices and discourages the careless use of monetary resources. If, instead, third parties are simply permitted to recover from the auditor for mistakes in the client's financial statements, the auditor becomes, in effect, an insurer of not only the financial statements, but of bad loans and investments in general. [13]
Courts and commentators advocating auditor negligence liability to third parties also predict that such liability might deter auditor mistakes, promote more careful audits, and result in a more efficient spreading of the risk of inaccurate financial statements. For example, the New Jersey Supreme Court reasoned: The imposition of a duty to foreseeable users may cause accounting firms to engage in more thorough reviews. This might entail setting up stricter standards and applying closer supervision, which would tend to reduce the number of instances in which liability would ensue. Much of the additional cost incurred because of more thorough auditing review or increased insurance premiums would be borne by the business entity and its stockholders or its customers.... Accountants will also be encouraged to exercise greater care leading to greater diligence in audits. ( Rosenblum v. Adler, supra, 461 A.2d at p. 152.) We are not directed to any empirical data supporting these prognostications. From our review of the cases and commentary, we doubt that a significant and desirable improvement in audit care would result from an expanded rule of liability. Indeed, deleterious economic effects appear at least as likely to occur. In view of the inherent dependence of the auditor on the client and the labor-intensive nature of auditing, we doubt whether audits can be done in ways that would yield significantly greater accuracy without disadvantages. (Siliciano, supra, 86 Mich.L.Rev. at pp. 1963-1968.) Auditors may rationally respond to increased liability by simply reducing audit services in fledgling industries where the business failure rate is high, reasoning that they will inevitably be singled out and sued when their client goes into bankruptcy regardless of the care or detail of their audits. As a legal economist described the problem: The deterrent effect of liability rules is the difference between the probability of incurring liability when performance meets the required standard and the probability of incurring liability when performance is below the required standard. Thus, the stronger the probability that liability will be incurred when performance is adequate, the weaker is the deterrent effect of liability rules. Why offer a higher quality product if you will be sued regardless whenever there is a precipitous decline in stock prices? (Fischel, The Regulation of Accounting: Some Economic Issues (1987) 52 Brooklyn L. Rev. 1051, 1055.) Consistent with this reasoning, the economic result of unlimited negligence liability could just as easily be an increase in the cost and decrease in the availability of audits and audit reports with no compensating improvement in overall audit quality. ( Id. at pp. 1055-1056; Siliciano, supra, 86 Mich.L.Rev. at pp. 1960-1965.) (5)(See fn. 14.), (4c) In light of the relationships between auditor, client, and third party, and the relative sophistication of third parties who lend and invest based on audit reports, it might also be doubted whether auditors are the most efficient absorbers of the losses from inaccuracies in financial information. [14] Investors and creditors can limit the impact of losses by diversifying investments and loan portfolios. They effectively constitute a broad social base upon which the costs of accounting errors can be spread. (Siliciano, supra, 86 Mich.L.Rev. at p. 1973.) In the audit liability context, no reason appears to favor the alleged tortfeasor over the alleged victim as an effective distributor of loss. ( Ibid. ; Bilek, supra, 39 Sw.L.J. at pp. 705-707.) [15] Plaintiffs argue that the kinds of factors we have discussed can be adequately assessed by the triers of fact on a case-by-case basis. According to the argument, if the auditor's error is economically insignificant or the causal relationship between reliance on the audit report and financial injury is too attenuated, the trier of fact will simply find no negligence or no proximate cause. We are not so confident. In applying the Biakanja factors ( supra, 49 Cal.2d 647), we are necessarily required to make pragmatic assessments of the consequences of recognizing and enforcing particular legal duties. In our judgment, a foreseeability rule applied in this context inevitably produces large numbers of expensive and complex lawsuits of questionable merit as scores of investors and lenders seek to recoup business losses. In view of the prospects of vast if not limitless liability for the thoughtless slip or blunder, the availability of other efficient means of self-protection for a generally sophisticated class of plaintiffs, and the dubious benefits of a broad rule of liability, we opt for a more circumscribed approach. In so doing, we seek to deter careless audit reporting while avoiding the spectre of a level of liability that is morally and economically excessive. The dissent acknowledges, as we do, the complexity of the problem before us and the necessity of a legislative process of study, debate, experimentation, and careful rulemaking. In view of the nature of the problem, we refrain from endorsing a broad and amorphous rule of potentially unlimited liability that has been endorsed by only a small minority of the decided cases. As we recently stated: In the absence of clear legislative direction ... we are unwilling to engage in complex economic regulation under the guise of judicial decisionmaking. ( Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142, 1168 & fn. 15 [278 Cal. Rptr. 614, 805 P.2d 873].) For the reasons stated above, we hold that an auditor's liability for general negligence in the conduct of an audit of its client financial statements is confined to the client, i.e., the person who contracts for or engages the audit services. Other persons may not recover on a pure negligence theory. [16] (6a) There is, however, a further narrow class of persons who, although not clients, may reasonably come to receive and rely on an audit report and whose existence constitutes a risk of audit reporting that may fairly be imposed on the auditor. Such persons are specifically intended beneficiaries of the audit report who are known to the auditor and for whose benefit it renders the audit report. While such persons may not recover on a general negligence theory, we hold they may, for the reasons stated in part IV(B) post, recover on a theory of negligent misrepresentation. (7) The sole client of Arthur Young in the audit engagements involved in this case was the company. None of the plaintiffs qualify as clients. [17] Under the rule we adopt, they are not entitled to recover on a pure negligence theory. Therefore, the verdict and judgment in their favor based on that theory are reversed.
One difficulty in considering the problem before us is that neither the courts (ourselves included), the commentators, nor the authors of the Restatement Second of Torts have made clear or careful distinctions between the tort of negligence and the separate tort of negligent misrepresentation. The distinction is important not only because of the different statutory bases of the two torts, but also because it has practical implications for the trial of cases in complex areas such as the one before us. (8) Negligent misrepresentation is a separate and distinct tort, a species of the tort of deceit. Where the defendant makes false statements, honestly believing that they are true, but without reasonable ground for such belief, he may be liable for negligent misrepresentation, a form of deceit. (5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 720 at p. 819; see also § 1572, subd. 2 [[t]he positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true]; § 1710, subd. 2 [[t]he assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true].) Under certain circumstances, expressions of professional opinion are treated as representations of fact. When a statement, although in the form of an opinion, is not a casual expression of belief but a deliberate affirmation of the matters stated, it may be regarded as a positive assertion of fact. ( Gagne v. Bertran (1954) 43 Cal.2d 481, 489 [275 P.2d 15].) Moreover, when a party possesses or holds itself out as possessing superior knowledge or special information or expertise regarding the subject matter and a plaintiff is so situated that it may reasonably rely on such supposed knowledge, information, or expertise, the defendant's representation may be treated as one of material fact. ( Gagne v. Bertran, supra, 43 Cal.2d at p. 489; Cohen v. S & S Construction Company (1983) 151 Cal. App.3d 941, 946 [201 Cal. Rptr. 173]; see also 5 Witkin, Summary of Cal. Law, supra, Torts, § 680 at pp. 781-782; BAJI No. 12.32.) There is no dispute that Arthur Young's statements in audit opinions fall within these principles. But the person or class of persons entitled to rely upon the representations is restricted to those to whom or for whom the misrepresentations were made. Even though the defendant should have anticipated that the misinformation might reach others, he is not liable to them. (5 Witkin, Summary of Cal. Law, supra, Torts, § 721 at p. 820; Rest.2d Torts, § 552, coms. (g) and (h); Christiansen v. Roddy (1986) 186 Cal. App.3d 780, 785-787 [231 Cal. Rptr. 72 [appraiser who negligently evaluated property for mortgage company not liable to investors in a loan secured by the property].) (6b) Of the approaches we have reviewed, Restatement Second of Torts section 552, subdivision (b) is most consistent with the elements and policy foundations of the tort of negligent misrepresentation. The rule expressed there attempts to define a narrow and circumscribed class of persons to whom or for whom representations are made. In this way, it recognizes commercial realities by avoiding both unlimited and uncertain liability for economic losses in cases of professional mistake and exoneration of the auditor in situations where it clearly intended to undertake the responsibility of influencing particular business transactions involving third persons. The Restatement rule thus appears to be a sensible and moderate approach to the potential consequences of imposing unlimited negligence liability which we have identified. We recognize the rule expressed in the Restatement Second of Torts has been criticized in some quarters as vague and potentially arbitrary. In his article advocating a foreseeability rule, Justice Wiener generally criticized the Restatement rule as resting solely on chance considerations and fortuitousness (e.g., the state of the mind of the accountant and the scope of his engagement) having, in his view, nothing to do with increasing the flow of accurate information. (Wiener, supra, 20 San Diego L.Rev. at p. 252.) We respectfully disagree. In seeking to identify a specific class of persons and a transaction that the supplier of information intends the information to influence, the authors of the Restatement Second of Torts have applied basic factors of tort liability recognized in this state and elsewhere (see Biakanja, supra, 49 Cal.2d 647). By confining what might otherwise be unlimited liability to those persons whom the engagement is designed to benefit, the Restatement rule requires that the supplier of information receive notice of potential third party claims, thereby allowing it to ascertain the potential scope of its liability and make rational decisions regarding the undertaking. The receipt of such notice justifies imposition of auditor liability for conduct that is merely negligent. Moreover, the identification of a limited class of plaintiffs to whom the supplier itself has directed its activity establishes a closer connection between the supplier's negligent act and the recipient's injury, thereby ameliorating the otherwise difficult concerns of causation and of credible evidence of reliance. Finally, no unfairness results to those recipients who are excluded from the class of beneficiaries because they have means of private ordering â among other things, they can establish direct communication with an auditor and obtain a report for their own direct use and benefit. For these reasons, the rule expressed in the Restatement Second of Torts represents a reasoned, not an arbitrary, approach to the problem before us. (9) Additional criticism has been leveled at the Restatement approach because of the vagueness of its intent to benefit language. As we read section 552 of the Restatement Second of Torts, it does not seek to probe the state of mind of the accountant or other supplier of information. Rather, it attempts to identify those situations in which the supplier undertakes to supply information to a third party whom he or she knows is likely to rely on it in a transaction that has sufficiently specific economic parameters to permit the supplier to assess the risk of moving forward. As the authors of section 552 observe, liability should be confined to cases in which the supplier  manifests an intent to supply the information for the sort of use in which the plaintiff's loss occurs. ( Id., com. (a), italics added.) This follows because the risk of liability to which the supplier subjects himself by undertaking to give the information ... is vitally affected by the number and character of the persons, and particularly the nature and extent of the proposed transaction.  ( Id., com. (h); italics added.) The intent to benefit language of the Restatement Second of Torts thus creates an objective standard that looks to the specific circumstances (e.g., supplier-client engagement and the supplier's communications with the third party) to ascertain whether a supplier has undertaken to inform and guide a third party with respect to an identified transaction or type of transaction. If such a specific undertaking has been made, liability is imposed on the supplier. If, on the other hand, the supplier merely knows of the everpresent possibility of repetition to anyone, and the possibility of action in reliance upon [the information] on the part of anyone to whom it may be repeated, the supplier bears no legal responsibility. (Rest.2d Torts, § 552, com. (h).) The Restatement Second of Torts approach is also the only one that achieves consistency in the law of negligent misrepresentation. Accountants are not unique in their position as suppliers of information and evaluations for the use and benefit of others. Other professionals, including attorneys, architects, engineers, title insurers and abstractors, and others also perform that function. And, like auditors, these professionals may also face suits by third persons claiming reliance on information and opinions generated in a professional capacity. In a series of decisions, our Courts of Appeal have endorsed liability for negligence or negligent misrepresentation in the dissemination of commercial information to persons who were intended beneficiaries of the information. In several of these cases, section 552 of the Restatement Second of Torts was consulted or relied on as a general statement of the rule of law. We review several typical examples. A lender loaned money to a partnership. When the loan was not repaid, the lender sued lawyers retained by the partnership, alleging in part they had negligently prepared and delivered to their client for transmission to the lender an opinion letter expressing the erroneous view that the partnership was a general partnership composed of 14 general partners. The lender's complaint alleged that the lawyer and law firm knew and understood that [the opinion letter] was to be shown to [the lender] in order to induce [it] to make loans to [the partnership]. ( Roberts v. Ball, Hunt, Hart, Brown & Baerwitz (1976) 57 Cal. App.3d 104, 107 [128 Cal. Rptr. 901].) The court held the complaint stated a cause of action, observing: [A] legal opinion intended to secure benefit for the client, either monetary or otherwise, must be issued with due care, or the attorneys who do not act carefully will have breached a duty owed to those they attempted or expected to influence on behalf of their clients. ( Id. at p. 111, italics added.) In another action, purchasers of stock from a lawyer's clients sued the lawyer, alleging he had negligently advised his clients the stock could be issued as dividends and sold to the purchasers without jeopardizing an exemption from registration of the stock pursuant to federal securities laws. The SEC later suspended the exemption, causing the purchased stock to lose value. In contrast to Roberts, there was no allegation the legal advice was ever communicated to plaintiffs or relied on by them in purchasing the stock. ( Goodman v. Kennedy (1976) 18 Cal.3d 335, 343 [134 Cal. Rptr. 375, 556 P.2d 737].) In upholding a dismissal of the purchasers' complaint following the sustaining of demurrers without leave to amend, we distinguished Roberts, characterizing it as a case in which an attorney gives his client a written opinion with the intention that it be transmitted to and relied upon by the plaintiff in dealing with the client. ( Id. at p. 343, fn. 1.) We further observed: In that situation the attorney owes the plaintiff a duty of care in providing the advice because the plaintiff's anticipated reliance upon it is `the end and aim of the transaction. ' ( Ibid., citing Glanzer v. Shepherd, supra, 135 N.E. 275, italics added.) [18] Plaintiffs ask us to read Goodman consistently with their foreseeability theory of liability. They point to language that the attorney owed no duty of care to the purchasers in the absence of any showing that the legal advice was foreseeably transmitted to or relied upon by plaintiffs or that plaintiffs were intended beneficiaries of a transaction to which the advice pertained. ( Goodman v. Kennedy, supra, 18 Cal.3d at p. 339.) Seizing on the foreseeably transmitted language, plaintiffs maintain we were describing two distinct theories of liability â an opinion letter model and a third party beneficiary model. They then reason their case falls within the first model because an audit report is analogous to an opinion letter. Assuming the analogy were apt, we cannot reasonably read Goodman so broadly. In Goodman, there was no transmission of any of the attorney's allegedly ill-conceived advice to any plaintiff, foreseeable or unforeseeable. Thus, our foreseeably transmitted language was merely dictum designed to emphasize the weakness of plaintiff's position in that case. Other than International Mortgage Co. v. John P. Butler Accountancy Corp., supra, 177 Cal. App.3d 806, plaintiffs cite no California case in which the court has recognized a cause of action for professional negligence or negligent misrepresentation on behalf of a third party except those that fit what they call the third party beneficiary model. As in Roberts and Goodman, California courts have consistently required some manifestation on the part of a professional who offers an opinion, information, or advice that he or she is acting to benefit a third party or defined group of third parties in a specific and circumscribed transaction. Thus, in Burger v. Pond (1990) 224 Cal. App.3d 597 [273 Cal. Rptr. 709], the court held that a husband's second wife could not sustain a claim against the husband's attorney for negligence in dissolving the husband's first marriage. The court observed the attorney never agreed implicitly or explicitly to perform legal services intended directly to benefit the second wife. ( Id. at p. 607.) Although the summary judgment showed the second wife was present in the attorney's office during consultations with the husband about the dissolution, and that the lawyer was informed of their plans for marriage and children as soon as the first marriage was dissolved, these facts were deemed insufficient to create a triable issue of fact. The court held that the attorney was employed by the husband alone to benefit him alone by procuring a dissolution of his marriage. As the court remarked: `[F]oreseeability' is not a substitute for legal duty. ( Id. at p. 606.) [19] Similarly, in a series of cases involving title insurers and abstractors, the Courts of Appeal have applied Restatement Second of Torts section 552 and its intended beneficiary standard to determine whether liability to third parties would be imposed. In these cases, the title companies were found liable only to persons (1) for whose guidance information was supplied; (2) who justifiably relied on the information; and, most importantly, (3) who were intended to be influenced by the communication. Intent to influence is a threshold issue. In its absence there is no liability even though a plaintiff has relied on the misrepresentation to his or her detriment, and even if such reliance were reasonably foreseeable.  ( Stagen v. Stewart-West Coast Title Co. (1983) 149 Cal. App.3d 114, 121-122 [196 Cal. Rptr. 732], italics added.) [20] (10) Having determined that intended beneficiaries of an audit report are entitled to recovery on a theory of negligent misrepresentation, we must consider whether they may also recover on a general negligence theory. We conclude they may not. Nonclients of the auditor are connected with the audit only through receipt of and express reliance on the audit report. Similarly, the gravamen of the cause of action for negligent misrepresentation in this context is actual, justifiable reliance on the representations in that report. Without such reliance, there is no recovery regardless of the manner in which the audit itself was conducted. (See Garcia v. Superior Court (1990) 50 Cal.3d 728, 737 [268 Cal. Rptr. 779, 789 P.2d 960] (maj. opn.), 741-744 (Lucas, C.J., conc.) [both opinions emphasizing importance of justifiable reliance element in cause of action for negligent misrepresentation based on furnishing false information].) By allowing recovery for negligent misrepresentation (as opposed to mere negligence), we emphasize the indispensability of justifiable reliance on the statements contained in the report. As the jury instructions in this case illustrate, a general negligence charge directs attention to defendant's level of care and compliance with professional standards established by expert testimony, as opposed to plaintiff's reliance on a materially false statement made by defendant. [21] The reliance element in such an instruction is only implicit â it must be argued and considered by the jury as part of its evaluation of the causal relationship between defendant's conduct and plaintiff's injury. In contrast, an instruction based on the elements of negligent misrepresentation necessarily and properly focuses the jury's attention on the truth or falsity of the audit report's representations and plaintiff's actual and justifiable reliance on them. Because the audit report, not the audit itself, is the foundation of the third person's claim, negligent misrepresentation more precisely captures the gravamen of the cause of action and more clearly conveys the elements essential to a recovery. ( Garcia v. Superior Court, supra, 50 Cal.3d at pp. 737, 741-744.) [22] Based on our decision, the California standard jury instructions concerning negligent misrepresentation should be amended in future auditor liability cases to permit the jury to determine whether plaintiff belongs to the class of persons to whom or for whom the representations in the audit report were made. For the guidance of trial courts, we suggest the jury be instructed on the elements of negligent misrepresentation as set forth in BAJI No. 12.45 with the addition of the following instruction in lieu of BAJI No. 12.50: The representation must have been made with the intent to induce plaintiff, or a particular class of persons to which plaintiff belongs, to act in reliance upon the representation in a specific transaction, or a specific type of transaction, that defendant intended to influence. Defendant is deemed to have intended to influence [its client's] transaction with plaintiff whenever defendant knows with substantial certainty that plaintiff, or the particular class of persons to which plaintiff belongs, will rely on the representation in the course of the transaction. If others become aware of the representation and act upon it, there is no liability even though defendant should reasonably have foreseen such a possibility. By suggesting the above instruction, we do not preclude additional or alternative instructions consistent with our decision and the law of negligent misrepresentation. In adopting the approach of Restatement Second of Torts section 552, subdivision (2) regarding the plaintiff or group of plaintiffs who may sue for negligent misrepresentation, we do not necessarily endorse other provisions of section 552 or of the Restatement or their terminology describing the torts of negligent and intentional misrepresentation. In California, the elements of the misrepresentation torts (which are also denominated forms of deceit) are prescribed by statute (§§ 1572; 1710) and our common law tradition. Our decision effects no change in those traditional elements; it merely describes the category of plaintiffs who may recover provided all other elements are satisfied. Moreover, we do not suggest the question of intent to benefit a third party will inevitably involve a question of fact. If competent evidence does not permit a reasonable inference that the auditor supplied its report with knowledge of the existence of a specific transaction or a well-defined type of transaction which the report was intended to influence, the auditor is not placed on notice of the risks of the audit engagement. In such cases, summary adjudication will be appropriate because plaintiff will not, as a matter of law, fall within the class of intended beneficiaries.
As Chief Judge Cardozo recognized in Ultramares, supra, 174 N.E. 441, the liability of auditors to third parties presents different policy considerations when intentional fraud is involved. The secondary position of the auditor in the presentation of financial statements, the moral force of the argument against unlimited liability for mere errors or oversights and the uncertain connection between investment and credit losses and the auditor's report pale as policy factors when intentional misconduct is in issue. By joining with its client in an intentional deceit, the auditor thrusts itself into a primary and nefarious role in the transaction. (11) In this context, the auditor's actual knowledge of the false or baseless character of its opinion is not required: If the defendant has no belief in the truth of the statement, and makes it recklessly, without knowing whether it is true or false, the element of scienter is satisfied. (5 Witkin, Summary of Cal. Law, supra, Torts, § 705 at pp. 806-807; § 1572, subd. 1 [fraud includes [t]he suggestion, as a fact, of that which is not true, by one who does not believe it to be true]; § 1710, subd. 1.) We are directed to no authority that would immunize auditors from liability to third parties for intentional misrepresentation; the general rule appears to be to the contrary. (Rest.2d Torts, § 531 [One who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons whom he intends or has reason to expect to act or to refrain from action in reliance upon the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the type of transaction in which he intends or has reason to expect their conduct to be influenced.].) Consistent with our analysis, the elements of the tort of intentional misrepresentation as set forth in BAJI No. 12.31 should be supplemented with the following instruction in lieu of BAJI No. 12.50: The representation must have been made with the intent to defraud plaintiff, or a particular class of persons to which plaintiff belongs, whom defendant intended or reasonably should have forseen would rely upon the representation. One who makes a representation with intent to defraud the public or a particular class of persons is deemed to have intended to defraud every individual in that category who is actually misled thereby. (See BAJI No. 12.50 [third alternative]; § 1711.) Again, as explained in our discussion of negligent misrepresentation, additional or alternative instructions consistent with our decision may be appropriate.