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Auditor's Case

Autor:   •  April 1, 2014  •  Essay  •  984 Words (4 Pages)  •  1,213 Views

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1. The cost of extending auditor's liability to third party users to public accounting firms is that the firms will now be held liable for any financial statements that are misstated, and the error has not been noted or corrected, that a third party relies on in order to make decision. The public accounting firm will now be required to pay damages for any loss that a third party user encounters, because the audit firm was negligent when performing the audit. By extending the auditor's liability to third party users this is a benefit to the audit clients because they are not held liable to third party users. The external auditor is liable for the negligence of the audit client's financial statements. In the case study, the New York Supreme Court ruled, "Touche did have an obligation to Ultramares, and to other parties relying on Stern's financial statements, although the accounting firm's contract was expressly and exclusively with Stern." Stern was not held liable to third party users, the external auditor was liable. The audit client is not guilty of negligence. This is also a benefit to third party users who rely on the financial statements. This will allow foreseen third party users to recover damages by relying on the audit client's financial statements that were negligently audited. The courts should have the authority to socialize investment losses because a third party user who relied on the external auditor's audit suffered damages and should be compensated for their negligence.

2. Under the Securities and Exchange Act of 1933, companies were required to initially register their securities with the SEC so the investor can make an informed decision regarding the purchase before they invest. Under the Securities and Exchange Act of 1934, companies were required to file ongoing information with the SEC. The act of 1933 helps investor's decide if they initially want to invest in the company. The act of 1934 provides investors with ongoing annual reports of the financial statements of the company. It helps investor's decide if they want to continue to invest in the company based on the company's profitability from their financial statements. The Securities Exchange Act of 1934 was created to provide governance of securities transactions on the secondary market and regulate the exchanges and broker-dealers to protect the investing public. The auditor's litigation risks differ under common law from the 1934 act because under common law the external auditor would not be held liable for any acts of negligence to third parties. "Negligence is not actionable unless there is a breach of duty owing by defendants to the plaintiff. " By holding the defendant's duty accountable to third parties would be to assume a potential liability to almost the entire world. In the act of 1934, an auditor is held liable to individual investors who obtain a copy of the company's


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