The Ninth Circuit Court of Appeals has affirmed a lower court’s decision, finding that an independent accountant isn’t automatically liable for errors in a client’s financial statements, even if the accountant certified those statements for an initial public offering (IPO). The case, *Hunt v. PricewaterhouseCoopers LLP (PwC)*, centered on claims brought under Section 11 of the Securities Act of 1933.
The plaintiffs, investors in Bloom Energy Corp., argued that PwC, Bloom Energy’s outside accountant, should be held responsible for alleged misstatements in Bloom Energy’s 2017 financial statement. These misstatements, they claimed, stemmed from Bloom Energy’s incorrect accounting for Managed Services Agreements (MSAs), a type of sale-leaseback arrangement involving Bloom Energy’s fuel-cell servers. Bloom Energy, which designs, manufactures, and sells these servers, had treated the MSAs as operating leases instead of capital leases, which the plaintiffs alleged was incorrect.
The Core Issue: Accountant’s Liability vs. Due Diligence
The court addressed a central question: Is an independent accountant strictly liable for information in a registration statement or a client’s financial statements simply because they certified those statements? The Ninth Circuit said no.
Instead, the court emphasized that under the relevant statute (15 U.S.C. § 77k(b)(3)(B)(i)), an accountant can avoid liability if they demonstrate that, after a “reasonable investigation,” they had “reasonable ground to believe and did believe” that the statements were true and not misleading at the time the registration became effective.
The court also cited the Supreme Court’s decision in *Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund*, which provides further protection for accountants. Under *Omnicare*, an accountant isn’t liable for their opinions about underlying financial documents as long as the opinion was “sincerely held.”
PwC’s Role: Preparer vs. Certifier
The plaintiffs argued that PwC should be held liable as a preparer of Bloom Energy’s financial statements. However, the court found that PwC did *not* prepare the statements; Bloom Energy did. PwC was hired to express an opinion on Bloom Energy’s 2016 and 2017 financial statements based on audits.
The court also rejected the argument that PwC was liable as a certifier. The court stated that PwC’s audit opinion did not contain any material misstatements of fact or omissions. Rather, it was a statement of opinion based upon the subjective judgment of the MSA classification.
MSAs: Opinion vs. Fact
The court further explained that Bloom Energy’s financial statements regarding the classification of the MSAs were opinions, not statements of fact. Bloom Energy had to make judgments about the useful life of its Energy Servers in determining whether the MSAs should be classified as operating or capital leases. The court noted that the plaintiffs hadn’t sufficiently proven that Bloom Energy’s judgments about the Energy Servers’ useful life were untrue.
The Court’s Reasoning: Balancing Investor Protection and Accountant Responsibility
The Ninth Circuit’s decision highlights the balance between protecting investors and setting reasonable standards for accountants. While the Securities Act aims to ensure accurate financial reporting, it doesn’t impose strict liability on accountants for every error in a client’s statements. Accountants are required to conduct a reasonable investigation and express their opinion in good faith, but they aren’t guarantors of absolute accuracy.
The court made it clear that holding accountants strictly liable would transform audits, making them prohibitively expensive. This was not Congress’s goal when enacting the statute. Congress limited the liability of accountants by only requiring a “reasonable investigation and reasonable ground for belief.”
The court concluded that PwC was not liable, stating that the PwC audit report did not incorporate the alleged misstatements or untrue facts, and clearly stated that in its opinion, the consolidated financial statements presented fairly, in all material respects, the financial position of Bloom Energy in conformity with accounting principles generally accepted in the United States of America.