MISPERCEPTION # 5

Auditing is a calling like the other learned professions and, hence, its liability for errors — and the assessment of damages, no matter how vast — should be treated in like fashion by the courts.

In truth, the auditor's exposure to risk is unique. His or her error may be related to claims of enormous financial losses and/or claims by a vast number of persons and entities. To be sure, the doctor in today's litigious environment is also susceptible to huge malpractice judgments, but at least he or she only operates on one person at a time. The auditor, by contrast, must worry about the fact that each one of his or her "operations" — each audit report, that is — can subject him or her to liability to thousands of persons and entities ostensibly reading and relying upon that one report.

Even more dangerous than the comparison of accounting with other professions is the so-called "widget problem" mentioned earlier; that is, analogizing the accountant to the product manufacturer. The most basic flaw in this analogy is that it overlooks the very nature of the process of auditing. It is a process that is based very much on judgment and is not capable of perfection, but which is nonetheless commonly perceived as capable of perfection and which is particularly susceptible to assessment and reappraisal by hindsight. Making widgets is simply not so difficult or so subjective. Not only is the audit examination not a mass-produced "widget," but as Mr. Gormley noted, to the extent that there is a widget involved — that is, the company's financial statements — it is not the auditor's widget, it is the company's. That, of course, is the first misperception noted above.

Ironically, in some ways auditors might be better served if their product were a widget, rather than simply several paragraphs on a piece of paper. A manufacturer of widgets, if there are, say, 2,000 of its widgets out there in the hands of consumers, at least has been compensated for manufacturing all of those 2,000 widgets. By contrast, an auditor may produce only one copy of his or her report and give it to his or her client. If 20 of his or her clients' creditors then want copies of that report, the auditor typically doesn't get to sell 20 more copies of the report and receive 20 additional fees. Rather, someone (usually the client) simply makes and sends out the additional copies, creating no additional financial benefit for the auditor but nonetheless multiplying the extent of his or her potential liability. Auditors now try to contain this risk by requiring third parties to sign agreements representing that they are not relying on these reports and/or capping damages as a condition for obtaining access, but this is not always possible or practicable. Accordingly, at least for now, the fact remains that, because of the virtually universal, free-of-additional-charge accessibility of their product, auditors are subject to a much greater magnitude of risk in proportion to their profit than are the manufacturers of widgets.

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