AUDITORS’ LIABILITY IN THE UNITED STATES- BEYOND BEING RESPONSIBLE TO THE CLIENTS

Abstract

The liability of auditors in the United States, as in most common law jurisdictions, is traditionally based on contract between the auditors and their clients. However, over time, the scope of liability has expanded to include third parties, such as investors, creditors, and regulatory bodies. This article examines the laws, rules and judicial pronouncements that shape auditors’ liability beyond the auditors and the client whom had a contractual relationship. It explores landmark American judicial precedents, including cases like Ultramares Corp v Touche, Credit Alliance Corp v Arthur Andersen & Co, and Bily v Arthur Young & Co, to illustrate how the courts shift and adapt the law in balancing auditors’ accountability, not forgetting concerns over an open-ended liability. The article analyses the doctrines of privity, near-privity, and the foreseeability standard used by the courts to determine auditors’ liability. Auditors’ embracing and applying these doctrines ultimately determines their audit risk level, even as they leverage them in undertaking business opportunities and challenges in high-risk audits. Furthermore, it considers the policy rationale behind limiting or expanding third-party claims, including deterrence, fairness, and the potential to overwhelm the auditing profession. The article concludes by advocating for a liability framework that protects the investing public’s interest without exposing auditors to floodgates risks that will eventually undermine their viability in light of the recent corporate collapses like Enron and Arthur Anderson that provoked the recent global financial crisis.