The Ninth Circuit penned an opinion this week that goes most of the way toward absolving auditors from liability if they issue qualified opinions for businesses that turn out to be Ponzi schemes.

A receiver was appointed after the government uncovered a $950 million Ponzi scheme. The receiver sued the auditors for $51 million on theories of professional negligence, aiding and abetting, and unjust enrichment. The auditors were paid about $900,000 for issuing 10 reports over five years. The auditors resigned after the company’s principal was arrested.

The auditors’ qualified opinion letters were critical to the outcome of the case. The opinions all said that the company’s method for valuing assets was not in accordance with generally accepted accounting principles (GAAP). The reports all concluded by saying that the effect on the financial statements of the failure to follow GAAP “is not reasonably determinable.”

The receiver contended that the auditors should have gone further by either issuing no reports, delivering adverse opinions, or resigning.

The district court dismissed the suit, finding that the complaint did not plausibly show causation. The Ninth Circuit affirmed on Feb. 23 in an opinion by Circuit Judge Stephen S. Trott.

The receiver was seeking damages for harm to the company, not to the investors, because the district court had held that the receiver did not have standing to sue on behalf of the investors. Consequently, Judge Trott held that the negligence and abetting claims required proof that the auditors’ tortious conduct was the proximate cause of harm to the company.

To prove causation, Judge Trott said that the trustee must prove “reasonable reliance, even though reliance per se is not a technical element of his causes of action.” He then went on to say that the auditors could not have given “substantial assistance” in recruiting new investors unless the investors reasonably relied on the audit reports.

The receiver’s suit failed because there was no evidence that any investors even saw the reports, much less relied on them. In addition, as the district court held, the perpetrators of the fraud did not rely on the audit reports.

The appeals court also upheld dismissal of the unjust enrichment claim because the engagement agreement provided that the auditors would have no liability for the company’s misrepresentations.

Auditors might be liable in other cases if there is evidence that investors had the reports or relied on them. A fraudster, however, is less likely to hand out audit reports if the opinions are qualified.