One of the fundamental issues in the discussion of auditors' liability is to whom auditors should be held liable for ordinary negligence under common law. Three judicial viewpoints prevail: the restrictive privity approach, the more liberal Restatement approach, and the most liberal foreseeability approach. To compare these three approaches from an efficiency perspective, this paper develops a model that features an owner-managed firm, an independent auditor, a continuum of unrelated lenders, and an impartial court. Double effort-incentive problems appear for the firm and the auditor. The firm has an additional incentive problem due to the sequential nature of its borrowing. This paper shows that the effort-incentive problem and the sequential borrowing problem of the firm render unambiguous improvements in audit effort/quality, capital investment, and social welfare as the judicial approach governing the scope of auditors' liability becomes more conservative.
Review of Accounting Studies – Springer Journals
Published: Oct 21, 2004
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera