Auditors' Liability: Its Role in the Corporate Governance Debate

Abstract

The purpose of this paper is to examine the role of auditors' liability in the context of the corporate governance debate currently taking place in the United Kingdom. Much of the current dissatisfaction with the role of auditing may be attributed to an apparent tension between the economic and legal interpretations of the auditor's risk sharing role. There are powerful economic motives for both company management and other stakeholders to seek an extension of auditors' liability. This paper argues against an extension of liability to third party audit users. It is suggested that such a move would create difficulties in the auditor-client relationship, accentuate moral hazard problems associated with third party litigation and lead to a restriction in the availability of professional indemnity insurance. Ultimately, the effect is likely to be a reduction in the availability of audit services, especially to high risk companies such as new ventures and participants in the market for corporate control.