While most of us public company securities lawyers may not spend our day-to-day thinking about how audit firms might be subject to liability for statements in their clients’ IPO registration statements, that potential for liability certainly does impact the day-to-day of public companies and their lawyers because (I assume) it is something the higher-ups at audit firms think about. So here’s an interesting development out of the 9th Circuit, explained by this Morgan Lewis alert:

After Bloom Energy issued revisions to its 2016 and 2017 financial statements and a restatement of its 2018 and 2019 financial statements, Bloom stockholders amended an existing securities class action to add claims under Section 11 against the accounting firm that audited Bloom’s 2016 and 2017 financial statements. The case centers on the accounting for Managed Services Agreements (MSA) that Bloom used in connection with sale-leaseback arrangements . . .

In their complaint, plaintiffs alleged the accounting firm was liable under Section 11 for purportedly actionable statements and omissions in Bloom’s registration statement regarding its accounting for MSAs because the audit opinion did not identify that Bloom should have classified the MSAs as capital leases instead of operating leases. The accounting firm moved to dismiss, and the District Court granted the motion. Rather than amend their complaint, plaintiffs appealed to the Ninth Circuit.

On appeal, plaintiffs did not challenge the District Court’s dismissal of their claim that the audit opinion itself was false or misleading apart from its certification of the financial statements. . . Rather, plaintiffs argued that the accounting firm should be strictly liable under Section 11(a)(4) of the Securities Act for the misstatements in Bloom’s financial statements.

In early November, in Hunt v. PricewaterhouseCoopers LLP, the 9th Circuit rejected this argument and reiterated the negligence standard for accountant liability under Section 11:

Section 11 includes a due diligence defense, which requires that “accountants … exercise due diligence in investigating the materials provided to them using the accepted practices of their profession.” Accordingly, Section 11 imposes a negligence standard for an accountant’s liability, and in order for plaintiffs to prevail on a Section 11 claim, they must establish that an accounting firm did not have a “reasonable ground to believe” and did not believe, “at the time such part of the registration statement became effective, that the statements therein were true.”

But what about the claim that the audit opinion itself was false or misleading?

The Ninth Circuit next addressed applicability of the Supreme Court’s 2015 decision in Omnicare . . . in which the Supreme Court excluded statements of opinion from liability under Section 11 . . . Hunt was the first time the Ninth Circuit had occasion to consider applicability of Omnicare to auditors.

Without hesitation, the Ninth Circuit “extend[ed]” the holding in Omnicare to accountants and noted that doing so is consistent with Section 11’s due diligence defense. The Ninth Circuit held: “accountants may be liable for statements of fact if they did not act with due diligence; however, accountants will not be liable for statements of opinion, even if they reflect a subjective belief that admits there is a possibility of error, as long as the statement of opinion was sincerely held.”

Finally, the Ninth Circuit clarified that an “accountant’s certification of financial statements is nothing more than an opinion,” and held that, in this case, the accounting firm could not be liable for its audit opinion because that opinion “did not make any material misstatements of fact or omissions but rather was merely a statement of opinion based…upon the subjective judgment of the MSA classification.”

[Plus] Bloom’s determination of whether the accounting standards mandated that Bloom treat the MSAs as capital leases or operating leases involved significant accounting judgments, which rendered those determinations opinions, not facts. [So] Omnicare doubly applied because the accounting firm’s audit report was an opinion on top of company management’s opinion.

And thank goodness! Because the alert says:

Section 11 does not “make accountants guarantors of every statement made by the issuer; to make such a holding would turn the whole accounting world upside down” and make audits prohibitively expensive.

– Meredith Ervine