Trends in independent auditor liability: The emergence of a sane consensus?

Abstract

Judicial changes in tort rules governing third-party claims against independent auditors have created a liability crisis for the public accounting profession. This paper examines both historical and recent developments in the efforts of courts to fashion workable rules in this area. The deficiencies of the two dominant views—one arguing for a narrow scope of liability based on the contractual nature of the audit engagement and the other proposing broad liability based on the foreseeability of harm to third parties from a negligently performed audit—are discussed. The paper suggests that the recent retreat of courts from expansive liability rules and their adoption of a compromise liability rule may signal a growing appreciation of the inappropriateness of either of the traditional conceptualizations. To date, however, such decisions fail to reflect fully the unique nature of the public audit engagement.