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Recent corporate scandals: when should auditors be liable to stockholders?

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With the recent prevalence of corporate scandals in the United States, there have been many efforts made towards reform.

You have been asked to evaluate and debate the following proposal:

Accounting firms should be liable to pay stockholders if they give a company a clean audit and it goes bankrupt within a year.

Please make sure to cite all sources and show where they are used so I can reference them.

Also, please make sure to include:

1. "How" you arrived at your answer(s)
2. "What" facts and sources you reviewed and considered
3. "Why" your response is the best one from all the alternatives

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Solution Summary

The 779 word, well-cited solution presents the case against auditors illustrated with examples from news articles and court cases.

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Should Accounting Firms be liable to pay stockholders if they give a company a clean audit and it goes bankrupt within a year?

My answer to this question is yes and no. Accounting Firms should be liable if they have misrepresented the audit in any way and if their intent was a deliberate misrepresentation of the accounting information reported. If the audit however, was in fact clean and the Accounting Firm's methods had absolutely no bearing on the bankruptcy then the firm should not be liable to the stockholders (this is my opinion...you can disagree with me if you want). To make sure there is a limited liability here, some Accounting Firms such as PricewaterhouseCoopers and Ernst & Young have begun adding disclaimers to their reports, warning that only shareholders can hold the accounting firms liable for bookkeeping fraud or errors. These disclaimers warn that in the case of bad bookkeeping, only a company's stockholders and not its employees, bondholders, or investors have the legal right to sue.

Often times an accounting firm is sued when one of its clients declares bankruptcy. This will point in the direction of the defendant, most likely the firm that certified the company's financial statements. Whether or not that ...

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