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Court Ruling May Broaden Auditor Liability

Martinek Paul J. | March 13, 2007

An influential federal appeals court has ruled for the first time that auditors can be liable under securities laws if they fail to correct false financial statements.

A trial judge had dismissed the suit, filed under Rule 10b-5 of the Securities Exchange Act, against an accounting firm, finding that the plaintiffs had failed to state a viable theory of recovery. But the New York-based 2nd U.S. Circuit Court of Appeals said the judge was wrong to conclude that the accountants didn’t face any liability.

An auditing firm can incur liability under the Exchange Act, the appellate court wrote, whenever it makes a statement in its certified opinion “that is false or misleading when made, subsequently learns or was reckless in not learning that the earlier statement was false or misleading, knows or should know that potential investors are relying on the opinion, yet fails to take reasonable steps to correct or withdraw its opinion and/or the...

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