Abstract Litigation against auditors arising from the S&L debacle has highlighted the public accounting profession's concerns about its growing legal liability exposure. Both the extent of the profession's current exposure and the risk of future exposure should other financial services industries experience widespread failures make it imperative that the legal issues in the S&L cases be resolved in a manner consistent with the profession's survival. To date, auditors' liability concerns have led them to undertake law reform efforts aimed at reducing their negligence liability to third parties, eliminating or modifying joint and several liability rules, and changing the "American rule" allowing unsuccessful plaintiffs to avoid paying defendants' legal costs. Such reform efforts, however, are unlikely to come in time to aid defendant auditors in the S&L cases. Further, the S&L cases are likely to show-case another significant, but less remarked-upon dimension of auditors' liability problems: the difficulty auditors often face in raising their clients' contributory fault as a defense. Under traditional contributory negligence rules negligent auditors who could show any client contributory fault could completely escape liability for their own negligence. To avoid this, many courts followed the lead of National Surety Corporation v. Lybrand, and held that only client fault which prevented auditors from effectively performing the audit could serve as a defense. Although this restriction may have been justified under contributory negligence legal regimes, it makes little sense under the comparative negligence principles now prevailing in most states, principles designed to avoid contributory negligence's harsh effects by assuring liability proportionate to fault. Nonetheless, some courts have affirmed National Surety's application in the comparative fault context, and others may do so in the pending S&L cases where issues concerning the relative fault of S&L management and auditors loom large. Accounting research can have an impact on the resolution of the comparative fault issue by shedding light on the judicial assumptions underpinning the National Surety doctrine. Are liability rules such as National Surety necessary to deter auditor negligence? What impact does the National Surety doctrine have upon auditors' ability to estimate and hence pass on their legal risk? What effects does expanded auditor liability under the National Surety doctrine have upon auditing effort and audit quality? The future of the public accounting profession may depend upon the answers to such questions. We identify a number of research questions related to this emerging legal threat, and propose a research program based upon the laboratory markets program to provide answers to these questions.
Hill et al. (Mon,) studied this question.