Limiting Auditors' Defenses in Negligence Lawsuits: Recent Developments in the Audit Interference Rule

Abstract

The objectives of this article are to: (1) define the audit interference rule (hereinafter "A.I.R.") and describe its purpose; (2) summarize the historical case law pertinent to the A.I.R.; (3) delineate the U.S. states that recognize the A.I.R. from those that do not; (4) explain how the A.I.R. is impacted by the existence of a state's comparative negligence statute; and (5) tell how recent developments in case law are affecting the A.I.R. The purpose of the A.I.R. is to limit the scope of an auditor's contributory negligence defense in a negligence lawsuit filed by a client. The A.I.R. provides that the client's negligence is a defense only when it has contributed to the accountant's failure to perform his contract and to report the truth. New York was the first state to recognize the A.I.R.; other states adopting the rule include Illinois, Kansas, Mississippi, Nebraska, Oklahoma, Pennsylvania, Texas and Utah. These states have either never recognized the A.I.R, or have abolished it.: Arkansas, Florida, Michigan, Minnesota and Ohio. Recent case law has highlighted several developments in the A.I.R., including: (a) an auditor accused of professional negligence may be required to specifically state how the client's alleged negligence interfered with the auditor's ability to conduct the audit; (b) the A.I.R. may also be applicable whenever a third-party beneficiary of an audit, such as a bank, sues an auditor for professional negligence; (c) the A.I.R., which limits the scope of an auditor's contributory negligence defense, has nothing to do with the separate in pari delicto defense which, if applicable, operates as an absolute bar to a claim based on equally wrongful acts of both parties; and (d) the court's granting of a jury instruction on a client's alleged contributory negligence should be the exception, not the rule.