Case Fred Stern & Company, Inc.

It would impact the work of auditors in terms of the care they exercise in preparing the auditor’s report. The cost would be more time spent on audits and the clients would need to better prepare their own reports. The range and number of persons who could suffer loss consequent upon negligent of auditors is large and includes investors and creditors. It would benefit them greatly because the audit work should be done with better care therefore they can use the statements with more trust. I feel that the judge should have authority to decide who auditors are liable to.

In this case is clear that Touche was negligent and they should have liability to all foreseen third parties. 2)In section 11 of the securities act of 1933 the auditors have the burden of proof and in the securities exchange act of 1934 section 18 the plaintiffs have the burden of proof and auditors cannot be held liable for ordinary negligence. They must prove they suffered an economic loss, the financial statements contained a material misstatement, the loss was caused by reliance on the materially misstated statements, and auditors were aware that the financial statements contained a material misstatement.

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This difference exist because people would buy shares after they know that a company is going bankrupt and in making the burden of proof on the plaintiff it would take that away. In the SEC act of 1933 the plaintiffs only have to prove that they suffered an economic loss and the statements there were material misstatement. By having to show reliance on the statements it takes away a defense that the auditors had which is the causation defense.

The defense for auditors in security exchange act of 1933 is due diligence or causation defense.In SEC act of 1934 it is good faith which is no knowledge of the material misstatement. Under common law auditors are liable to reasonably foreseeable third parties. 3)The key differences in the report is that in audit reports that we have today it tells us the standard that the audit was performed in accordance with and has the signature of the auditor.

It would also state that the financial statement is free of material misstatements and in their opinion is fairly stated.In the 1920 version it said that in their opinion it is true and correct view of their financial condition. There were fewer regulations in the 1920s and after the stock market crash the government wanted to gain the trust of investors back so they created the SEC and had a set standard so investors and creditors can look at the report and understand it. 4)The balance sheet was thought to provide a clear picture of the company’s financial position so at the time third parties felt it was sufficient financial information.Over time more and more companies have become interstate and multinational corporations and there was more need for a federal standard. With the growth of public companies there were standards created so that investors would feel safe to invest and it would help the average investor and protect them from companies.

5)The auditor responsibility is to the client and audit risk is used to determine the amount of audit procedures needed to perform the audit at an acceptable level. The purpose is to be objective and should not be considering the type and number of third parties.No the auditor should not insist that the third parties be identify because they are not responsible to distribute the financial statements to the third parties, the client is. In doing their report it is for third parties but, they are doing the report for their client. Yes it would eliminate liability to nonprivity parties but it is impossible to do a report that meets the objectives for all parties. There is a set standard for auditing so that all parties can use for a basis for their decision.

Author: Tricia Drake


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