Financial Statement Insurance: A New Approach to Ivestor Protection

The accounting profession rapidly is moving toward a crisis in liability. Members of the investing public are suing accountants with mounting frequency and success. This article will analyze briefly the origin and present dimensions of the crisis, and then propose a plan for replacing court-imposed liability with insured liability through the offering of financial statement insurance. The essentials of the plan can be simply stated. Insurance would be offered by accountants to investors on a voluntary basis in conjunction with purchases and sales of corporate stock and securities. Individual investors would be able to purchase from the auditors of a corporation assurance that the most recent, audited financial statements of that corporation in fact fairly represent its financial condition as of the date of the statements. All investors would be more confident of the independence of accountants, since a portion of the accountants’ compensation no longer would come directly from their corporate clients. Amendments to the Securities Acts would insulate accountants from liability to uninsured investors except in instances of fraud or gross negligence constituting fraud.