The Elimination of "Scienter" in Determining the Auditor's Statutory Liability .

ABSTRACT: The Supreme Court's decision in Ernst & Ernst vs. Hochfelder on March 30, 1976 appears to have substantially limited the auditor's statutory liability to third parties under the Securities Act of 1934 and Rule 10b-5 of the Securities Exchange Commission. Prior to the ruling, there was considerable confusion and dispute as to whether "scienter" or mere acts of negligence was required in imposing statutory liability on accountants. This paper examines the issues of the scienter controversy as interpreted by various court decisions and legal scholars prior to the Hochfelder case. The rationale of the Supreme Court's deliberations in requiring the presence of scienter in all future 10b-5 litigation is analyzed, coupled with its impact on the accounting profession. Finally, although acts of negligence can no longer impose statutory liability to third parties under Rule 10b-5, the courts still will have to determine what auditing procedures are excluded under the scienter umbrella.