Lecture 16 - Auditor's Liability

Question 1

Companies Act 2006 - Section 507 - Offences in connection with auditor’s report

Answer 1

(1) A person to whom this section applies commits an offence if he knowingly or recklessly causes a report under section 495 (auditor’s report on company’s
annual accounts) to include any matter that is misleading, false or deceptive in a material particular.

Question 2

Penalty for offences under section 507 is….

Answer 2

A fine

Question 3

Companies Act - Section 993 - Offence of fraudulent trading

Answer 3

If any business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, every person who is knowingly a party to the carrying on of the business in that manner commits an offence.

-Auditors if charged would have to refute claims that they knew the business was fraudulently trading

Question 4

Punishment for disobeying section 993 is….

Answer 4

Penalty fine or imprisonment of no more than 10 years

Question 5

Theft Act 1968 - Section 17 - False accounting

Answer 5

(1) Where a person dishonestly, with a view to gain for himself or another or with intent to cause loss to another,—
(a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or
(b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular; he shall, on conviction on indictment, be liable to imprisonment for a term not exceeding seven years.

Question 6

Basis of civil liability:

Answer 6

• Auditors add credibility to the financial statements
• If auditors issue an unqualified report and the financial statements turn out not to be ‘true and fair’, users who suffer loss from relying on the financial statements might feel the auditor is at fault.

Question 7

Potential ways of reducing auditor liability:

Answer 7

• Reform law on joint and several liability
• Capping liability
• Incorporation
• Limited liability partnership

Question 8

Reforming law on joint and several liability

Answer 8

•When more than one party is responsible for a loss, liability is joint and several
-If one party is insolvent or has limited resources, the others bear the full liability for the loss
-Auditor likely to be the one sued as they usually have professional liability insurance
•Potential solution is to make the auditors responsible for only a proportion of the liability

Question 9

Capping liability

Answer 9

• Since 2008 auditors have been permitted, under the terms of the Companies Act, to use Liability Limitation Agreements (LLAs) to reduce the threat of litigation from clients.
• LLAs are clauses built into the terms of an engagement that impose a cap on the amount of compensation that can be sought from the auditor.

Question 10

Incorporation and Limited Liability Partnerships:

Answer 10

Limited liability partnerships
• Partners liability limited to the amount they put into the business
• All Big Four and most top UK accounting firms are LLP