Accounting and Law

• Author: Vern Krishna
• Pages: 216-215

216 Understanding Financial Statements

Chapter IX: Accounting and Law

A. GENERAL COMMENT

Accountants and auditors can be liable under contract, tort, secur-

ities, or tax law to users of nancial statements. e scope and ex-

tent of their liability depends upon the particular branch of law, the

user of the nancial statements, the nature of the claims, statutory

structures, and public policy considerations.

Although public accountants perform a wide variety of ser-

vices for their clients, their primary function, and the one that

most frequently generates lawsuits against them, is nancial aud-

iting. Accountants are the traditional target in business lawsuits.

is is because most business failures, whether of public or pri-

vate companies, involve some aspect of corporate nancials. e

plainti might complain that the statements were prepared with-

out adequate care in the audit process or that the auditors misap-

plied GAAP or IFRS. For example, the plainti may allege that the

statements are misleading, whether innocently or fraudulently, and

caused the plainti (or class of plaintis) nancial harm.

ere is another reason, however, why accountants are oen in

the crosshairs of plaintis’ lawyers. Accounting rms do not like

to be dragged into court, where litigation can extend for years and

attract attention in the business press. In many cases, it is the in-

surance coverage that attracts plaintis’ lawyers, like bees to honey.

us, accountants and accounting rms are amenable to settlement,

if the settlement is within their professional insurance limits, and