Amicus update: successful effort by CalCPA Amicus Curiae Committee.

• Author: Durkin, Ron
• Position: Government relations

Following the CalCPA Amicus Curiae Committee's efforts in the case of DeJohn vs. Wheeler (California CPA, March/ April 2016, Page 5), the committee's efforts have again translated into a successful result and ruling with a wide-ranging impact for many CPAs.

CalCPA, along with the AICPA, recently sought leave to file an amicus brief in a case pending before the U.S. Ninth Circuit Court of Appeals that raises a legal issue of importance to the profession.

The member firm in the case, Stonefield Josephson, had a limited role of auditing one of dozens of entities formed by Private Equity Management Group Inc. As to that entity, the auditors issued a qualified opinion warning of serious deviations from GAAP in the financial statements, and specifically disclaiming any opinion about the effect of the GAAP violations on management's financial statements.

Nonetheless, PEMGroup, through its court appointed receiver, sued the auditors claiming they were negligent in performing their audit, causing plaintiff injury. The plaintiff argued that it did not need proof that anyone relied on the audit opinion to prove that any conduct of the auditor caused it injury.

The trial court disagreed and held that to prove causation in a professional negligence case like this, it's necessary to prove justifiable reliance on the audit opinion. In this case, given the qualified nature of the opinion, the court held that as a matter of law, plaintiff could not prove such reliance. The plaintiff has challenged that holding on appeal.

CalCPA's amicus brief argues that the Court of Appeal should affirm the trial court's opinion, and that proof of reasonable reliance is necessary for at least three reasons:

* The absence of the reliance requirement would allow management to avoid its own responsibility for providing accurate financial statements, thereby upsetting the balance between the role of management as opposed to the auditors in the preparation of the financial statements and thus weakening the integrity of the financial reporting process.

* Without a requirement that a plaintiff prove reliance, liability could result simply from the fact that an audit was performed, significantly raising the litigation risk imposed on auditors. As a consequence, the cost of performing audits would inevitably increase and potentially reducing the availability of audit services, particularly for new or unsophisticated entities, as auditors rationally respond to such increased risk by...