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accountant's negligence being associated in some way with their losses"?(n373) By "guarantee," Goldberg is referring to the tort remedy that would have been provided to third parties injured by auditor negligence, if it were not for the privity barrier that businessmen saw fit to retain for fifty years.

The answer, we think, is that times change. Goldberg, writing in 1988, thought that the necessity of protecting the accounting firm's brand name was a powerful and adequate deterrent against the firm's production of negligent audits. We think that there is at least the perception in financial markets that the incentives of tort law are now appropriate when once they may have been unnecessary.

In terms of economic efficiency, the issue is whether the benefits of the lower cost of capital derived from providing third parties with a tort remedy "guarantee" supplied by the auditor are outweighed by increased tort litigation costs under a no-privily rule. The solution to this equation is not immutable. The incentives (or temptations) for negligent audits can vary with conditions in the market for auditing. The market seems to be telling us that fifty years of experience is not dispositive -- there are such things as historical sea changes and watersheds. Changes in liability rules often derive from public reaction to dramatic increases in incidents of injurious conduct. The main thrust of this article is that there is a danger in overreacting to perceived defects in the current auditing environment.

But given the increasing conflict of interest pressures flowing from the American auditor-client relationship (which we detail elsewhere in this article),(n374) the increase in business failures, and the explosive growth of third party suits against even prestigious "brand name" auditors, we think the call for a return to the privily citadel will and should ultimately be rejected.

Statutory Caps on Tort Liability

There has been considerable experience in the United States with statutory caps on tort damages.(n375) Some of the statutes have provided for specific dollar caps on total recovery whether the damages are economic or noneconomic.(n376) A few take into consideration factors such as severe injury or disfigurement, inflation, average annual wage, and life expectancy.(n377) Others, especially those enacted more recently, limit only noneconomic damages.(n378)

Noneconomic damages are frequently defined as "pain, suffering, inconvenience, physical impairment, and other nonpecuniary damage."(n379) There would appear to be three reasons for limiting this component of a victim's judgment: first, there is the widespread belief that evaluating these injuries must always be speculative and thus open to abuse and prejudice; second, it is not clear that pain and suffering represents a social loss that must be fully compensated in the interest of economic efficiency; and third, noneconomic damages represent the lion's share of many personal injury judgments, thus, controlling these awards is an effective form of tort reform. The damages flowing from auditor negligence, of course, would be almost wholly economic.


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