Discussion of an Analysis of Auditor Liability Rules

Abstract

An Analysis of Auditor Liability Rules shows that proportionate liability can provide incentives for auditors to take greater effort than joint and several liability, even though the auditors face a higher level of liability under the joint and several liability regime. The model's contributions are its explicit incorporation of negligence theory in the liability regimes, so that auditors' actions affect their share of damages, and its recognition that joint and several liability differs from proportionate liability only when one defendant is insolvent. The main insight from this representation is that the provided by making auditors' share of the damages depend on their effort (hereafter the comparative negligence incentive) disappears under joint and several liability when the auditee is insolvent, since then the auditor must pay all the damages, regardless of the action chosen. The paper shows that proportionate liability actually provides more than joint and several liability whenever the comparative negligence incentive (which is absent in the joint and several regime) is stronger than the provided by the higher level of liability in the joint and several regime. As a result, auditors choose a lower level of effort under joint and several liability than they would with proportionate liability. This is an important insight to the extent that previous arguments and theories have failed to recognize how incentives depend on the comparative negligence incentive as well as the level of liability. By and large, conference discussion focused on three main topics: (1) the modeling strategy adopted, (2) the primary issue in the proportionate