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therefore, the discussion of the issues in the following subsections will not only be predominantly theoretical, it will have to rely on holdings derived primarily from personal injury and property damage precedents.

Contributory negligence

Contributory negligence as a defense to accountants' tort liability appears for the first time as an issue in Craig v. Anyon.(n165) In Craig, suits for breach of contract and negligence were brought by a securities broker against the broker's accounting firm. The client alleged negligence on the part of the firm in failing to discover the defalcations of a trusted employee. The accountants raised as an affirmative defense the negligence of the client and the negligence and criminality of its employees. In particular, the accountants asserted that the client should have discovered the loss and its cause without having to rely exclusively on the defendants. In reversing a jury verdict for the plaintiffs, a divided New York Court of Appeals held for the accountants on the issue of the client's contributory negligence.(n166)

The decision was widely attacked.(n167) Critics noted that the alleged negligence occurred in the performance of a contract entered into by the client expressly to free itself from having the responsibility to sniff out fraud.(n168) Why should the client be completely barred when the independent auditor has performed negligently? So argued the Craig dissent,(n169) whose view ultimately prevailed in New York(n170) and was adopted elsewhere.(n171)

Commentators felt there were sound policy reasons for limiting the scope of the contributory negligence defense by accountants. The value of accountants to the economy depends on their clients being able to rely on them.(n172) Of course, their undertakings are limited by contract, but within what they promise to do they should not escape liability altogether if they fail to perform at or above a reasonable standard. This view was later reflected in the National Surety decision(n173) in which the contributory negligence defense was limited to instances in which the client's negligence prevented the accountant from performing the contract and reporting the truth.(n174) Under a strict reading of National Surety, the client's negligent operation of the business will not excuse the negligent auditor, nor will the client's failure to follow the accountant's suggestions provide a defense.(n175)

In an all-or-nothing world the National Surety rule has weight. The negligent auditor who could have avoided the loss to its client by fully performing its contract of engagement should not be entirely insulated from liability simply because its client was lax. Yet, the unwillingness to provide negligent accountants with a complete defense can be applied with equal force to the proposition that a client who negligently fails to protect himself should not be able to obtain full redress from another party who merely compounds the wrongdoing by insufficient diligence.(n176) The accounting profession today would assert that the usual contract of engagement does not contain a warranty that fraud will be detected, nor is there a contractual obligation on the part of an auditor to actively search for all fraud regardless of materiality.(n177) Thus, it follows that the client who hires an outside auditor cannot relieve itself of its own obligations to maintain adequate internal controls and provide materially correct financial information.


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