The Financial Statement Auditor's Legal Liability for Negligence: The Roas to Compromise
Kodis, Cheryl M.
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This paper will begin with a brief overview of the research methodology used to gather the information contained throughout this honors project. This paper will then explain the background of the public accounting profession and will provide a brief overview of the auditor's contractual as well as tort liability for negligence. Next, the paper will discuss two dramatically opposing legal doctrines--strict contractual privity and reasonably foreseeable third party--and the viewpoints of the two opposing parties--the financial statement auditors and the third party financial statement users. Then, other "middle-of-the-road" legal doctrines will be examined. The paper will conclude with the author's opinion of the liability crisis and suggest potential ways to rectify the legal liability crisis--thus closing the expectation gap. This Honors Capstone was written to critically assess recent case-law and judicial decisions surrounding the financial statement auditor's legal liability for negligence. At the conclusion of this assessment, I will formulate a conclusion about which viewpoints and which judicial rulings will lead to my ideal compromise--allow for a prosperous accounting profession while still allowing injured investors to recover damages for actual audit failures.