Discussant's response to what are the courts saying to auditors?;

              Discussant's Response to
What Are the Courts Saying to Auditors?
Russell A. Taussig
University of Hawaii
Mr. Sommer, in his excellent paper, clearly and forcefully tells us that the courts are saying to the auditors: "the ante has been raised in the auditing game."
Whatever else the cases he cites imply, they indicate business will be good for attorneys in the liability area throughout the 1970's. In my opinion, these cases also will result, as with McKesson-Robbins, in an extension of auditing standards and an improvement in financial reporting.
Mr. Sommer summarizes the significant characteristics of the recent cases under three major headings.
1. The courts are making it much easier to sue the auditors.
2. The courts are asking auditors to establish generally accepted account­ing
principles; but where those principles are lacking, the courts are filling the voids.
3. The courts are holding the profession to its announced standards, but where the profession has been overly restrictive in defining such standards the courts are interpreting them quite broadly.
Let us consider these three characteristics concretely in terms of another case, that has yet to go to trial, that of National Student Marketing.
A civil action filed February 3, 1972 by the Securities and Exchange Com­mission
against National Student Marketing Corporation, its auditors and two law firms in U.S. District Court (Washington, D.C.) asks for injunctive and other relief.1 At this early stage, all we have is a complaint. The actual facts, as sub­stantiated
by the evidence and decided on by the courts, may differ from the allegations. Nonetheless, the legal concepts and accounting issues are of such immediate significance that they are worthy of discussion at this time. Let us, therefore, review the allegations of the SEC, bearing in mind the possibility of revisions before final judgment is in.
The SEC charges the defendants with fraud and deceit. If the SEC prevails, this case will expand the potential liabilities of independent accountants under Rule 10b-5 of the 1934 Securities Exchange Act for audited financial statements.
It also will enlarge the responsibilities of auditors for comfort letters beyond those delineated in Statement on Auditing Procedure No. 48. Consistent with its contemporary activist policy, the SEC seeks injunctive relief not only against the registrant but also against others, including Peat, Marwick, Mitchell & Co.
Allegations by Securities and Exchange Commission
The complaint against the auditors contains basically two charges:
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