Should accountants be liable to third parties if they conduct an audit in negligent manner? A half century ago, in Ultramares Corporation v. Touche, Niven & Co., Cardozo argued that they should not, unless their performance could be characterized as fraud. In recent years, courts in a minority of jurisdictions have concluded that Cardozo's argument is no longer compelling and they have found that "foreseeable" third parties could bring a tort action for ordinary negligence against the accountants. In addition to being subject to tort actions, accountants may also be liable under federal and state securities laws.
Suits against accountants by disgruntled shareholders and lenders have increased considerably in recent years. The accountants' increased exposure has manifested itself as one element of the so-called insurance crisis. Malpractice premiums have been rising, policy limits have been falling, and deductibles have been increasing. Some accountants have chosen to go bare, and some insurers have refused to write coverage for accountants perceived as high risks. The number of firms writing liability insurance for non-Big Eight accounting firms has fallen from twelve to three in the last five years.
Accounting Law | Insurance Law | Jurisdiction | Law | Securities Law | Torts
Victor P. Goldberg,
Accountable Accountants: Is Third-Party Liability Necessary?,
J. Legal Stud.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2643