A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated. This is an example of which of the following legal liability concepts?

Question

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This situation is an example of liability to third parties under common law. The financial institution, as a third party to the audit engagement, is suing the audit firm for not discovering the borrower's misstated financial statements, which has caused them harm. This type of liability is recognized under common law, which allows third parties to sue a professional service provider for negligence if they suffer damages as a result of the provider's failure to exercise reasonable care.

A Financial Institution Sues the Audit Firm for Failure to Discover