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St. Mary's Law Journal

Abstract

This Comment proposes that accountants be held liable to any foreseeable user of their work product to ensure the deterrence of negligence on their part. Currently, the three main common law theories concerning whether nonclients can sue accountants for negligence are: (1) the privity rule; (2) the Restatement (Second) of Torts § 552; and (3) the foreseeability standard. Many states follow the Restatement approach entitled “Information Negligently Supplied for the Guidance of Others.” Texas imposes liability on accountants but fails to extend protections to third parties who rely upon the accuracy of financial statements. Further, Texas liability does not expose accountants to a significant amount of liability to induce greater care. The foreseeability standard is the only appropriate standard to compensate the potential plaintiffs for their damages. The Restatement’s approach permits a limited group of nonclient third parties to recover for pecuniary losses resulting from an accountant’s negligence in providing services to clients. In Texas, courts fear that extending liability to foreseeable third parties will create unlimited liability, but accountants can take several steps to protect themselves. The notion that the client is the only one who will rely on an audit is outdated. More often than not, third parties are relying on an audit opinion, not a client, and the third parties can suffer economic injury. Furthermore, accountants are in a better position to absorb and spread the losses resulting from audit failures. The adoption of a reasonably foreseeable approach in Texas is necessary to restore investors’ and lenders’ confidence in the audited financial statement they rely on to make economic decisions.

Publisher

St. Mary's University School of Law

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