Post by Sapphire Capital on Jul 24, 2008 1:11:30 GMT 4
Efficient Third Party Liability of Auditors in Tort Law and in Contract Law
HANS-BERND SCHAEFER
University of Hamburg - Faculty of Law
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June 2007
German Working Papers in Law and Economics: Vol. 2004: Article 9
U. of St. Gallen Law & Economics Working Paper No. 2008-11
Abstract:
A wrong audit can cause damages to shareholders in secondary markets or to buyers of firms or shares in primary markets. This happens especially if outside investors base their decision on the audit and buy overpriced company shares. The scandals of Enron, Worldcom, Parmalat, Holzmann or Berliner Bankgesellschaft have shown that the management of a public corporation may have incentives to hide negative developments from shareholders and outside investors. This has triggered discussions within the European Union to regulate auditors' liability. My talk concentrates on some of the conceptual problems of this liability. The main proposition is that liability should be different in primary markets and in secondary markets. In primary markets, liability should be based on simple negligence without liability caps. But the rationale which leads to this result does not apply to secondary markets, that is for the annual audit of a listed stock company. Here it seems that economic considerations suggest a more lenient approach that might entail either liability for gross negligence or a liability cap.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1158351_code720524.pdf?abstractid=1137886&mirid=1
HANS-BERND SCHAEFER
University of Hamburg - Faculty of Law
--------------------------------------------------------------------------------
June 2007
German Working Papers in Law and Economics: Vol. 2004: Article 9
U. of St. Gallen Law & Economics Working Paper No. 2008-11
Abstract:
A wrong audit can cause damages to shareholders in secondary markets or to buyers of firms or shares in primary markets. This happens especially if outside investors base their decision on the audit and buy overpriced company shares. The scandals of Enron, Worldcom, Parmalat, Holzmann or Berliner Bankgesellschaft have shown that the management of a public corporation may have incentives to hide negative developments from shareholders and outside investors. This has triggered discussions within the European Union to regulate auditors' liability. My talk concentrates on some of the conceptual problems of this liability. The main proposition is that liability should be different in primary markets and in secondary markets. In primary markets, liability should be based on simple negligence without liability caps. But the rationale which leads to this result does not apply to secondary markets, that is for the annual audit of a listed stock company. Here it seems that economic considerations suggest a more lenient approach that might entail either liability for gross negligence or a liability cap.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1158351_code720524.pdf?abstractid=1137886&mirid=1