ACCT 622 Week 6 Discussion Board Forum 3 Reply/Critique Example

Should Auditors Answer to Every Foreseeable Reader? A Critique of a Classmate's Case for the Rosenblum Rule

The Argument and Its Strength

Marcus, your case study argues that the fairest rule is the one New Jersey adopted in Rosenblum v. Adler (1983): an auditor's duty of care should run to anyone the auditor could reasonably foresee relying on the statements, provided the client supplied them for a legitimate purpose. Your paper makes the moral case well. A bank that lends because an auditor certified the borrower's statements has relied on the auditor's skill, and a rule that leaves the bank without a remedy when the audit was careless seems to let the auditor profit from trust it did not honor. Your summary of Ultramares is also accurate and well organized. My concern is that the paper presents the foreseeability rule as the direction of the law, when the record shows the opposite, and it does not answer the reasons courts have given for rejecting it.

The Reasons Courts Rejected Foreseeability

The paper does not discuss Bily v. Arthur Young and Co. (1992), in which California's highest court considered and rejected the foreseeability rule. The court gave three reasons. Auditors do not prepare the financial statements and cannot control how widely the client distributes them. Sophisticated users such as lenders and investors can protect themselves, by contracting directly with the auditor, by demanding their own investigation or by pricing the risk. And exposing auditors to claims from every foreseeable reader would raise the cost of audits and could reduce their availability to smaller companies, without clear evidence that it would improve audit quality. You may not agree with those reasons, but a case for foreseeability has to answer them. Without that answer, the paper argues past its strongest opponent.

What Research Shows About the Direction of the Law

Your conclusion states that the law is moving toward broader liability. Pacini et al. (2000) examined the common-law countries and found the opposite trend: courts and legislatures have been narrowing the set of outsiders who can hold auditors liable, generally toward the Restatement's known-users rule or toward near-privity. Baker and Prentice (2008), tracing the origins of American liability rules, show that the concern about indeterminate liability that Cardozo expressed in 1931 was not an isolated view but the foundation of the common-law approach. A rule can be morally attractive and still be the minority position, and a case study has to say which it is. The Restatement rule, which most states follow, gives the bank in your example a remedy when the auditor knew the client was seeking a loan of that kind, which addresses much of your moral concern without extending liability to every reader (American Law Institute, 1977).

Does Broader Liability Improve Audits?

Your paper also claims that a foreseeability rule would make audits better, because auditors who can be sued by more people will work more carefully. That is a reasonable hypothesis, but the paper offers no evidence for it, and there are reasons to doubt that liability is the only or even the main discipline on auditors. Reputation matters as well. When Arthur Andersen admitted destroying Enron documents, the stock prices of its other clients fell significantly, which shows that investors price an auditor's credibility directly and that a firm's failures are punished in the market whether or not any particular reader can sue (Chaney & Philipich, 2002). Broader liability may add some deterrence at the margin, but it also raises insurance costs that are passed to clients, and it may push firms to avoid riskier clients rather than to audit them better. If you want to keep this argument, I would present it as one consideration with evidence on both sides rather than as a settled effect.

What Happened to Rosenblum

Your paper presents Rosenblum as current New Jersey law. It is not. The New Jersey legislature later adopted a statute that limits an accountant's liability to third parties to situations in which the accountant knew at the time of the engagement that the third party would rely on the work and acknowledged that reliance. In effect, the state that adopted the broadest rule moved close to New York's Credit Alliance test. That history strengthens the case against foreseeability and should appear in your paper.

Recommended Revisions

First, add a counterargument section that presents Bily's three reasons and responds to each. Second, correct the status of Rosenblum by noting the New Jersey statute. Third, revise the conclusion about the law's direction using the research above. Fourth, support or qualify the claim about audit quality with evidence. Fifth, consider arguing for the Restatement rule as a middle path that captures your moral concern while answering the objections.

Justice and Mercy

Micah sums up what the Lord requires as justice, kindness and a humble walk with God (English Standard Version Bible, 2001/2016, Micah 6:8). Liability rules are an attempt to do justice between auditors and the people they harm, and your paper rightly insists that relying lenders deserve consideration. The courts' answer is that justice also requires limits, and a Christian worldview can hold both: auditors should care for every reader of their work, while the law sets a boundary on who may sue.

References

American Law Institute. (1977). Restatement (second) of torts § 552.

Baker, C. R., & Prentice, D. (2008). The origins of auditor liability to third parties under United States common law. Accounting History, 13(2), 163-182. https://doi.org/10.1177/1032373207088177

Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992).

Chaney, P. K., & Philipich, K. L. (2002). Shredded reputation: The cost of audit failure. Journal of Accounting Research, 40(4), 1221-1245. https://doi.org/10.1111/1475-679X.00087

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Pacini, C., Martin, M. J., & Hamilton, L. (2000). At the interface of law and accounting: An examination of a trend toward a reduction in the scope of auditor liability to third parties in the common law countries. American Business Law Journal, 37(2), 171-236. https://doi.org/10.1111/j.1744-1714.2000.tb00271.x

Rosenblum v. Adler, 93 N.J. 324 (1983).