Opinion ID: 1348772
Heading Depth: 3
Heading Rank: 6

Heading: Burden to Accountants and Consequences to Community of Imposing Liability

Text: How heavy is the burden to accountants and what are the consequences to the community when the law makes accountants liable to foreseeable users of audit opinions? These are serious questions, deserving serious consideration. They should be answered on the basis of facts, not speculation. Yet the record before this court includes no competent evidence that would be helpful in addressing these issues. Absent a reliable and satisfactory basis for decision, this court can make no informed judgment on these issues and should not invoke these considerations in support of a rule that denies liability in derogation of the fundamental principle making persons liable for all foreseeable consequences of their negligence. This evidentiary void cannot be excused by a lack of experience with the liability rule in question. For several years now, accountants have been liable to foreseeable users of audit opinions in this state, as well as in New Jersey, Mississippi, and Wisconsin. (See International Mortgage Co. v. John P. Butler Accountancy Corp., supra, 177 Cal. App.3d 806; Rosenblum v. Adler, supra, 93 N.J. 324 [461 A.2d 138]; Touche Ross v. Commercial Union Ins. (Miss. 1987) 514 So.2d 315, 322; Citizens State Bank v. Timm, Schmidt & Co., supra, 113 Wis.2d 376 [335 N.W.2d 361]; see also, Blue Bell v. Peat, Marwick, Mitchell & Co. (Tex. Ct. App. 1986) 715 S.W.2d 408, 412 [we find the reasoning of the cases and commentators urging adoption of the foreseeability test persuasive].) The federal securities laws have an even stricter rule. An accountant who has certified any part of a registration statement containing an untrue statement of material fact is liable to any purchaser of the registered security. (15 U.S.C. § 77k(a)(4).) In an action under this federal law, the plaintiff need not prove that the accountant was negligent, although the accountant may escape liability by proving due diligence. ( Id., § 77k(b)(3); see Herman & MacLean v. Huddleston (1983) 459 U.S. 375, 382 [74 L.Ed.2d 548, 555-556, 103 S.Ct. 683].) Has the strict rule of liability under the federal securities laws caused accountants to refuse to certify financial data in registration statements? Is liability insurance available to accountants who engage in this work? Are accounting services more costly or less available in New Jersey than in New York? How have the different liability rules affected the incidence of accountant malpractice in New York and New Jersey? We simply do not know. It is reasonable to assume, however, that if serious adverse consequences had resulted from the rule of liability under the federal securities laws, or from the rule existing in New Jersey, Mississippi, and Wisconsin, those rules would have succumbed to legislative abrogation. Their continued existence is itself eloquent testimony that a rule of liability to foreseeable users of audit opinions does not destroy the accounting profession or otherwise have consequences demonstrably inimical to public welfare. Were it to be demonstrated that the burden of the existing liability rule is excessive, the proper solution would not be the severe and arbitrary curtailment of duty adopted by the majority. Rather, liability could be capped in a variety of less extreme and more evenhanded ways. For example, an accountant's maximum exposure for negligence in an independent audit could be fixed at a percentage of the reported net worth of the audited company. Or the accountant's opinion in the audit report could be backed by a surety bond in a similar amount, with recovery on the bond being a third party's sole recourse in cases of proven negligence. These approaches would preserve most of the benefits of the existing tort liability rule â especially the incentive for due care â while at the same time making less indeterminate the accountant's liability exposure for auditing work. To be sure, solutions like these would require legislation, but this is inherently a legislative problem because it requires thorough investigation and debate, followed by compromise, a certain amount of experimentation, and fine tuning of the law based on practical experience with its operation.