Resolving the Auditor Liability Problem—An Appraisal of Some Alternatives
Richard H. Murray
Touche Ross & Co.
Decades before others were discussing the problem of auditors' liability, indeed years before many of us were born, Mr. Justice Cardozo masterfully defined the problem in the Landmark case of Ultramares vs., Touche (then Touche, Niven & Co.):
The defendants owed to their employer a duty imposed by law to make their certificate without fraud, and a duty growing out of contract to make it with the care and caution proper to their calling. ... To creditors and investors to whom the employer exhibited the certificate, the defendants owed a like duty to make it without fraud, since there was notice in the circumstances of its making that the employer did not intend to keep it to himself. ... A different question develops when we ask whether they owed a duty to these to make it without negligence. If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences. (Emphasis added, 255 N.Y. 170, 174 N.E.441) (1931)
As a result of these concerns, the Ultramares decision held that, while auditors could be liable to their clients for simple negligence, they would have to be guilty of a considerably higher degree of fault in order to be liable in damages to third parties.
While the Supreme Courts of most States quickly followed the lead of Ultramares in cases involving claims against auditors, the first forty years after that decision saw a number of developments that ran counter to the Cardozo concern for avoiding destructive risks to the accounting profession:
• The Federal Securities Laws enacted in 1933 and 1934, contain specific provisions permitting the purchasers of corporate securities to recover damages from auditors for something akin to negligence. However,