Lecutre 19 - Auditor Liability

Question 1

What is the result of breach of statutory duties?

Answer 1

• civil wrong = individual suffers loss as a result of auditor not meeting statutory obligations
• criminal wrong = auditor DELIBERATELY signs audit report knowing to be false

Question 2

What is the breach of common law duties?

Answer 2

• Not working with reasonable skill and care, i.e. being negligent
• Can rise from contractual relationship or common law (3rd party)

Question 3

What qualifies as negligence?

Answer 3

• Not necessarily just complying with GAAS

- Practice reflecting “societal norms” decided by the courts

Question 4

What was the first legal case cited in terms of contractual obligation to clients?

Answer 4

AWA Limited v Daniels (1992)

Question 5

What were the main points in AWA Limited v Daniels (1992)?

Answer 5

• Auditor failed to highlight proper accounting records had been kept (breach of statutory duties)
• Auditor failed to inform board of internal control deficiencies (negligence, common law)

Question 6

What occurred during Equitable Life v EY? (2005)

Answer 6

Equitable Life said EY should have advised on a larger provision for certain liabilities
Claim was £2.05billion
EY fended this off

Question 7

What has been the general trend in third part liability?

Answer 7

• 1930 to 1990 increasing liability

- 1990 onwards, backtrack to lessened liability

Question 8

What was the findings of Ultramares Corporation v Touche (1931)?

Answer 8

No third party liability

Question 9

What was the findings of Donoghue v Stevenson (1932)?

Answer 9

Third party liability if physical harm occurred

Snail case!

Question 10

What were the findings of Candler v Crane Christmas & Co (1951)?

Answer 10

No third party liability, BUT Lord Denning mentioned a duty of care is owed to all those whom they know would rely on the accounts

Question 11

What were the findings of Hedley Bryne & Co v Heller and Partners (1963)

Answer 11

A duty of care is owed to third party relationships where a SPECIAL relationship exists

Question 12

What were the findings of Anns v Merton London Borough Council?

Answer 12

Not accounting case, but
Third party liability now in terms of RELATIONSHIP OF PROXIMITY
Test of knowledge replaced by test of REASONABLE FORESEEABILITY

Question 13

What were the findings of Caparo Industries Plc v Dickman et al (1990)?

Answer 13

Auditors don’t hold duty of care to individual shareholders or potential shareholders, BUT the shareholders as a body
Duty of care only arises if principles of FORESEEABILITY, PROXIMITY, and FAIRNESS are satisfied

Question 14

How can auditors ensure disclaimer of third party liability?

Answer 14

With a sentence in the report disclaiming any responsibility

Question 15

What are possible solutions for litigation threats?

Answer 15

1. Proportionate liability
2. Insurance
3. Statutory cap
4. 2006 Companies act “solution”
5. Incorporation
6. Become an LLP