"Under the spreading chestnut tree," accountants' legal liability -- A historical perspective;

              1
"Under the Spreading Chestnut Tree" Accountants' Legal Liability— A Historical Perspective
Paul J. Ostling*
Arthur Young & Co.
I. Introduction
It is difficult these days to read a week's worth of newspaper financial sections and business magazines without finding an article, sometimes lurid, discussing the role and liabilities of the public auditor. Those within the profession often view this attention as an undeserved, new development. Certainly the frequency, scope, and magnitude of civil suits against auditors have grown. There has, however, always been a close connection between the legal liabilities imposed upon auditors and the standards adopted by the profession—as well as its perceived scope and responsibilities of practice.
This paper describes some present and recent legal challenges facing the profession, their historical perspective, and predictions as to possible future developments. Taken in perspective, current attacks on the profession may be no more than a maturation and reevaluation of the auditor's standards and role. As the investor community becomes more sophisticated in its appreciation of the limitations in the auditor's role pursuant to generally accepted auditing standards (GAAS), and better understands the "gray areas" where generally accepted accounting principles (GAAP) permit more than one treatment of certain financial transactions, a credibility gap looms. To reduce the gap, the courts and legislators are attempting to regulate the profession and impose more "watchdog" responsibilities. Because of the gap, insurance companies and bright young graduates, fearful, respectively, of large legal judgments and less rewarding career opportunities may avoid the accounting profession.
Counter-productive activities of the professionals themselves and their representative associations may be complicating this trend. Nearly predatory competition drives the price of audit services downward at the very same time that the attendant risks are skyrocketing. Legislative "overseers" lambast the profession, often inaccurately and unjustifiably, but the associations often seem timid by comparison in their response. Public auditors must act quickly and affirmatively to resolve these conflicts in order to assure the future growth and profitability of the profession.
* The views expressed herein are those of the author individually.