AUDITOR NEGLIGENCE LIABILITY TO THIRD PARTIES REVISITED

The Enron disaster prompted the Sarbanes-Oxley Act of 2002 with new auditor independence rules, creation of the Public Company Accounting Oversight Board, corporate governance and certification requirements, whistleblower protections, extended statutes of limitations, and more severe penalties. Although some provisions affect privately traded companies, the Act was primarily aimed at publicly traded companies. In any event, Sarbanes-Oxley did not create a private cause of action against auditors for malpractice. Securities laws that govern fraud carry a heavy scienter burden, and the negligence and strict liability provisions in these laws are limited to specific parties and functions within the purview of the respective Acts. Common law fraud also includes the intentional or reckless disregard burden. The bread and butter of aggrieved investors, lenders, and creditors for claims against accountants performing auditing activities remain the common law negligence and negligent misrepresentation torts. The law on these torts is not monolithic among the states, and because the variance in approaches is dramatic, accountants, lawyers, and academics must constantly revisit auditor liability to nonclients to stay abreast of developments. This article reintroduces the subject in the post-Enron era, reviews key attributes of auditing functions-reports-standards, discusses the historical paradigm of liability, explores recent cases, and offers policy implications for this fact-driven, unsettled area. [PUBLICATION ABSTRACT]