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31 Queen's L.J. 148 (2005-2006)
The Rights and Responsibilities of Auditors to Third Parties: A Call for a Principled Approach

handle is hein.journals/queen31 and id is 160 raw text is: The Rights and Responsibilities of Auditors
to Third Parties: A Call for a Principled
Leon E. Trakman* and Jason Trainor'
In the wake of corporate finance and accounting scandals around the world, new legislation
enacted in Canada, the United States and the United Kingdom aims to better police the
conduct of auditors and to increase the independence of auditors from their clients. This
legislation does not, however, offer remedies to investors who suffer losses as a result of relying
on substandard audits. While courts will hold negligent or fraudulent auditors accountable to
the corporations for whom they work through the law of contract, they will not hold them
accountable to investors and other third parties. Common law courts in particular have relied
on untested public policy arguments to deny investors compensation for claims of negligent
The authors argue that the powers exercised by auditors come with a public responsibility to
protect third parties from the impact of auditor negligence or fraud, since investors and other
third parties who rely on audited statements have valuable economic interests that ought to be
recognized and upheld. They go on to present a coherent rationale by which courts could
recognize and protect those interests. They reason that auditors owe responsibilities to third
parties, not because third parties have the right not to be affected by the acts of auditors but
because auditors themselves are responsible for the exercise of their own rights. Courts must
recognize that auditors serve public functions: they provide financial statements that they
know will influence investors and other third parties. Since the exercise of an auditor's rights
impacts the public, the rights of auditors must necessarily be constrained by this public
responsibility, and a breach should be actionable. The authors conclude by identifying several
advantages that willflow from the legal recognition of auditor responsibility.
*B.Comm., LL.B. (Cape Town); LL.M., S.J.D. (Harvard). Dean and Professor of Law at
the University of New South Wales in Sydney, Australia.
**B.A. (Brock); M.A., LL.B. (Dalhousie). Cassels Brock & Blackwell LLP in Toronto,
Canada. The authors thank Sean Gatien, Christopher C. Nicholls, Will K. Weinstein,
Brian P. Koscak and Jason Green for their comments on preliminary drafts of the article,
and the Social Sciences and Humanities Research Council of Canada and the University
of New South Wales for supporting the study.

(2005) 31 Queen's L.J.

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