Auditor Liability (Cases) Flashcards
Rights of Auditors (4)
- Access to accounting records
- Information and explanations deemed necessary
- Attend and be heard at shareholder meetings
- Receive the notices that shareholders entitled to receive relating to shareholder meetings
Duties of Auditors (4)
- Comply with applicable auditing and assurance standards
- Report to shareholders
- Ensure report complies with requirements of all applicable auditing and assurance standards
- Send registrar and XRB copies of FS when auditee does not comply with the Act
Case for “The auditor is a watchdog but not a bloodhound”
Kingston Cotton Mill 1896
Case for auditor required to verify existence of assets stated in balance sheet
London Oil Storage v Seear, Haslack 1904
Case for heavy reliance on middle management, not reporting to top management. Cover all case for negligence.
Pacific Acceptance Corp v Forsyth 1970
Chat GPT Principles established in Pacific Acceptance Corp v Forsyth (IMPORTANT)
- Auditors must exercise due care and professional skepticism.
- They cannot rely solely on management’s word.
- Proper risk assessment and internal control review are essential.
- Negligence can lead to liability if material misstatements go undetected.
Case for an auditor cannot blindly accept evidence from company officials
Arthur E Green v CAD 1920
Liability of Auditors - Key Issues
- Auditors get sued
- Suits arise when a company fails
- Audit firms must be partnerships or sole practitioners unless they are a registered firm
- Liability is joint and several
- There is insurance, but high cost and severe limits
- Considerable uncertainty
- Law seems to be dynamic
- Firms claim this problem will have long term adverse affects
When can Auditors be liable? (4)
(The audit is negligently performed)
1. There is a duty of care owed
2. There is a breach in this DoC
3. The plaintiff has suffered loss as a direct result of the breach
4. The loss is quantifiable
Case where auditors were liable for not reporting to management a weakness in controls, management were also liable for contributory negligence
AWA v Deloitte Haskins & Sells
Case for escaping liability by virtue of a disclaimer AND auditors liability
Hedley Bryne v Heller & Partners
ICAEW: Liability could exist when: (4)
- Accountant was negligent
- Third party suffered financial loss
- Loss directly resulted from accountant’s negligence
- Accountant must have KNOWN purpose for which report was used and who was relying on the report, must have been AWARE of their reliance
MUST BE ALL 4
Case for Reasonable foreseeability (Duty of cared owed but Auditors escaped liability as it could not be established that plaintiff suffered a loss)
Scott Group v McFarlane
Case for no duty of care as three elements of foreseeability, proximity, and fairness.
Caparo Industries v Dickman
Case for not the auditors duty to advise on the merits of investing
Boyd Knight v Purdue and Matthew
Case for lack of causality between auditors and loss
Cambridge Credit v Hutcheson
Possible Solutions (6)
- Limited liability for audit firms
- A ‘statutory cap’
- Proportionate liability
- Engagement letters / LLAs
- Audit report liability disclaimers to 3rd parties
- Improved auditing
Summary: Auditors are liable when…
Negligent performance, duty of care, loss quantifiable as result
Summary: Duty of care is a very uncertain area…
Depends on relationship of proximity, which depends on foreseeability and knowledge
Case for negligent as they did not exercise a level of care that a reasonable auditor would. Auditors owed duty of care to company and anyone who may rely on the statements. Found liable.
Twomax v Dickson
