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Audit risk presumably should not change with changes in legal liability rules, but liability risk would certainly be subject to such change.(n297) In moving from an Ultramares privily rule to an Adler reasonable foreseeability one, a jurisdiction would dramatically increase liability risk for its auditors, although adherence to GAAS would provide that audit risk would remain as before. And if the rule of joint and several liability were retained at the same time privily barriers were relaxed, liability risk would be even greater.

These differences reflect the considerable tension existing between the accounting and legal professions, the two principal authorities charged with defining the scope of auditors' duties. For example, accountants and judges differ markedly in their attitudes over the auditor's duty to actively search out fraud. The American accounting profession accepts a general responsibility to detect material fraud but contends that certain types of fraud, particularly forgery and collusion, may not be detected even in a properly designed and executed audit. Lawyers and judges tend to believe that the duty to detect all material fraud exists and is paramount.(n298)

We take no position in this article as to which of the two authorities is correct except to state the obvious: the legal standard must prevail, whether right or wrong. Societal actors, even respected professions, cannot be permitted to circumscribe the standard of care they owe to others. Yet, when good faith tension over professional standards persists, perhaps the selection of legal rules governing damages in such cases should be responsive. In deciding whether to embrace or reject common law damages rules such as joint and several liability, we would argue that the current tension over professional standards is relevant; a damages-limiting approach seems more equitable for an activity for which there is little consensus as to standards, as opposed to an activity for which there exists relative unanimity as to the duties owed.

Not only can changes in legal rules increase liability risk, they can increase the uncertainty in calculating that risk. Under a strictly applied privily rule the auditor's liability risk assessment can be made with greater precision than under the reasonably foreseeable plaintiff rule. This is so because under the latter rule the class of potential plaintiffs is larger and their potential losses proximately caused by audit failure is more complex to estimate ex ante than would be the case if a duty of care were owed only the client. For example, there may be third party creditors, investors, and guarantors who risk their funds for reasons independent of an audit opinion. If this group could be readily identified ex ante, those risks could theoretically be removed from the auditor's liability risk assessment.(n299) Determining the class of foreseeable plaintiffs and estimating the magnitude of their potential losses is a daunting challenge to auditors operating under a reasonably foreseeable plaintiff rule.(n300)

Despite the difficulty of performing an ex ante liability risk calculus, society requires it of persons who would act reasonably. Under negligence principles auditors must make the best assessment they can, then take appropriate preventative action through the audit design and the quality control measures employed in carrying out the audit task.

To protect themselves against underassessment of liability risk, accounting firms generally purchase professional liability insurance (PLI). PLI, however, provides only a minimal investment in injury prevention through the insurer's ongoing monitoring of risk factors.(n301) PLI's principal purposes are to protect the auditor against financial catastrophe, to provide


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