Efficient Third Party Liability of Auditors in Tort Law and in Contract Law

U. of St. Gallen Law & Economics Working Paper No. 2008-11

German Working Papers in Law and Economics, Vol. 2004

LAW AND ECONOMICS OF RISK IN FINANCE, Peter Nobel and Marina Gets, eds., pp. 5-14, Schulthess, Zürich, 2007

11 Pages Posted: 7 Aug 2008 Last revised: 4 Nov 2009

See all articles by Hans-Bernd Schäfer

Hans-Bernd Schäfer

Bucerius Law School; University of Hamburg

Multiple version iconThere are 2 versions of this paper

Date Written: June 2007

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.

JEL Classification: K12, K13, G14

Suggested Citation

Schaefer, Hans-Bernd, Efficient Third Party Liability of Auditors in Tort Law and in Contract Law (June 2007). U. of St. Gallen Law & Economics Working Paper No. 2008-11, German Working Papers in Law and Economics, Vol. 2004, LAW AND ECONOMICS OF RISK IN FINANCE, Peter Nobel and Marina Gets, eds., pp. 5-14, Schulthess, Zürich, 2007, Available at SSRN: https://ssrn.com/abstract=1137886 or http://dx.doi.org/10.2139/ssrn.1137886

Hans-Bernd Schaefer (Contact Author)

Bucerius Law School ( email )

Jungiusstr. 6
Hamburg, 20355
Germany

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

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