What is the effect of a liability-imposing rule of liability for auditors in accounting?

From a public policy standpoint, the court emphasized the potential deterrent effect of a liability-imposing rule on the conduct and cost of audits: "The imposition of a duty to foreseeable users may cause accounting firms to engage in more thorough reviews. This might entail setting up stricter standards and applying closer supervision, which should tend to reduce the number of instances in which liability would ensue. Much of the additional cost incurred either because of more thorough auditing review or increased insurance premiums would be borne by the business entity and its stockholders or its customers." (Rosenblum v. Adler, supra, 461 A.2d at p. 152.)

Notwithstanding its broad pronouncements about the public role of auditors and the importance of deterring negligence by imposing liability, when the New Jersey court formulated a rule of liability it restricted the auditor's duty to "all those whom that auditor should reasonably foresee as recipients from the company of the statements for its proper business purposes, provided that the recipients rely on the statements pursuant to those business purposes." (Rosenblum v. Adler, supra, 461 A.2d at p. 153, italics added.) According to the court, its rule would preclude auditor liability to "an institutional investor or portfolio manager who does not obtain audited statements from the company" or to "stockholders who purchased the stock after a negligent audit" unless they could demonstrate "the necessary conditions precedent." (Ibid.)