Knapp Case 7.7

1. Auditors have to be held liable up to a certain point to keep auditing at a high grade. In the Fred Stern case however the auditor are trying to be pushed into too much liability. As long as the audit team take a significant test basis and can fairly accurately attest to the financial statements, they should not be held liable to third party financial users. Auditor should only be held liable to third party financial users if they did not follow GAAS. The courts should still handle delegating those third parties loses. 2. SEC Act of 1933 favored third party financial statement users. It allowed them to be paid their loses by the audit company if they could prove they suffered loses as well as the financial statements contained material misstatements and or errors. SEC Act of 1934 changed this requiring third party financial statement users to prove the audit company was fraudulent and/or negligence in conducting the audit. 3. In the 1920’s and before the audit was only conducted on the balance sheet, whereas now all statements are audited and issued with an auditor opinion. The changes in auditing standards were pushed on auditor by the increase in liability that third party financial statement users established through the court system. 4. The audit revolved from only a audited balance sheet to a full audited package by the increase in fraudulent activities performed by businesses. As the times changed more business became greedy for profit and were misstating their financial statements to mislead third parties especially lenders and investors. 5. Engagement letters would reduce the auditors liability, however if the audited financials are given to one user the accuracy of the statements should be the same if given to another third party user. Engagement letters should not be used because it could cause a trend to make