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The number of lawsuits being filed against auditors is on the rise. These authors reviewed 38 audit-related court cases that were adjudicated during a 14-year period. Their analysis reveals specific factors in the audit process that contribute to lawsuits.
The number of lawsuits and the dollar amount of damages awarded in proceedings against accountants have increased significantly in the past two decades. One researcher reported that between 1962 and 1987, more lawsuits were filed against accountants than in the entire history of the profession and that the largest accounting firms collectively have paid more than $250 million in settlements of mostly auditrelated lawsuits since 1980.1
Because of our research, we are able to identify the key factors that contribute to this trend of growing litigation against auditors. Increased use of financial statements has led to an attitude that investors and creditors are consumers of financial information
and, therefore, are entitled to expect more from their purchases than they did in the past.2 The public perceives that an audit precludes publication of misleading financial statements and that the financial reporting system warns financial statement users of impending business failure.3 Although Statement on Auditing Standards No. 30 maintains that the auditor is not an insurer or guarantor of the financial statements, the public perceives the auditor in that role. The public's perception that an auditor acts as a "guarantor" of financial statements is part of
a body of misperceptions known as the "expectations gap." These misperceptions have resulted in an increasing number of lawsuits against auditors. Nine Statements on Auditing Standards were issued in 1988 specifically to address these misperceptions.
The trend of court decisions and changes in legal statutes may also contribute to an increase in the number of audit-related lawsuits. The court's application of the "fraud on the market" theory, the product liability rule, and legal statutes have increased auditors' exposure to litigation. Under the "fraud on the market" theory, some courts have
ruled that investors need not have been aware of the misrepresentation if reliance on the financial statements by other investors affected the price of the security.4 The product liability rule holds that auditors are responsible for the quality of their work product and for passing these costs to their clients....