Module 10 - Auditor Responsibilities: Common Law Flashcards
To establish negligence and seek damages a, claimant must prove that:
- The accountant owed a duty of care to the claimant
- The work was negligently performed (that is, there was a breach of the duty of care)
- The claimant suffered a quantifiable reasonably foreseeable loss because of the auditors negligence
In establishing a duty of care, three factors are considered:
The loss arising was reasonably foreseeable
A close and direct relationship existed
The imposition of a duty of care was fair, just and reasonable
The auditor can have a duty of care to three groups:
Third parties
Audit clients
Shareholders
The standard of reasonable care requires:
The person concerned should do what a reasonable person would do and not what a reasonable person would not do.
The standard of a professional or skilled person will be higher
There are certain quality control measures firms can put in place to try to avoid negligence claims including:
Formalising the basis of the engagement contract
Identifying the risk profile of potential clients
Ensuring a sound audit approach is followed
Three most common defences against a negligence claim are:
Contributory negligence
Volenti non fit injuria
Ex turpi causa
Number of cases to be aware of in relation to negligence in the UK:
Caparo v Dickens
AWA Limited v Daniels
Hedley Byrne v Heller & Partners
RBS v Bannerman Johnstone Maclay and other
Barclays Bank v grant Thornton
Kingston cotton mill
Moore stephens v Stone & Rolls
What is common law?
The system of laws based on decision made by judges in court
What is common law based on?
The concept of judicial precedent
That is, the principle that the decision made by a court is binding on other courts in later cases involving a similar set of circumstances and the same point of law
Negligence definition
A breach of legal duty of care which results in loss or damage being suffered by another party
To establish negligence and seek damages, a claimant must prove that: (with businesses and accountants)
Accountant owed a duty of care to the claimant
The work was negligently performed
The claimant suffered a quantifiable, reasonably foreseeable loss because of the accountants negligence
The courts will only make an award of damages in relation to a negligence claim if:
It can be proved that a duty of care was owed to the claimant
Specifically in audit, there is a potential duty of care to three groups of people:
Audit clients
Shareholders of those clients
Third parties
Caparo v Dickman (Fidelity one - page 184)
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Principle of proximity (establishing duty of care)
The idea of restricting duty of care to those with whom there is a close and direct relationship
Foreseeability of harm (establishing duty of care)
Nature of the damage must be reasonably foreseeable from the perspective of a reasonable person in the defendants position
Proximity of relationship (establishing duty of care)
Claimant must belong to a determined class
Someone who reasonably foreseeable may suffer damage
Even if the nature of the damage is foreseeable and there is sufficient proximity between defendant and claimant, can a court sometimes declare there to not be a duty of care?
Yes
This can create a whole host of issues
Duty of care to audit clients (establishing duty of care). How is the engagement letter useful here?
It sets out the responsibilities of the auditor whilst performing the statutory audit
AWA Likited v Daniels - 1992 case. What happened? - page 186
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Hedley Byrne Ltd v Heller & Partners (1964). What happened? Page 187
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In order for a special relationship to exist, a number of factors must be in place:
One person must be acting in a professional or expert capacity
The other person relies on the advice they are given
The person giving the advice knows or should know that their advice will be relied on
(If these conditions are met - a duty of care arises)
Royal Bank of Scotland plc v Bannerman Johnstone Maclay and Others (2002). What happened? - page 188
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Barclays Bank v Grant Thornton (2015). What happened? - page 188
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Who is the audit report addressed to?
The shareholders of the company
Who were responsible for appointing the auditor
Caparo v Dickman (1990). What happened? - page 189
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To establish negligence and seek damages, a claimant must prove what?
The accountant owed a duty of care to the claimant
The work was negligently performed
The claimant suffered a quantifiable, reasonably foreseeable loss because of the auditors negligence
A duty of care can be established where?
The economic loss arising was reasonably foreseeable
There was a close and direct relationship between the defendant and claimant
The imposition of a duty of care is to be fair, just and reasonable in the circumstances
The auditor can have a duty of care to three groups
Third parties
Audit clients
Shareholders
The standard of reasonable care requires…
That the person concerned should do what a reasonable person would do and not what a reasonable person would not do
There are a number of factors that can be considered in determining whether a duty of care has been breached:
Professional / skilled persons - higher test than reasonable person test
Probability of injury - is risk is high, person is expected to take greater care to ensure duty of care is not breached
Seriousness of the risk - if dealing with more vulnerable (eg children) level of care is greater
Practicability and cost - defendant is not expected to eradicate the risk of injury or loss - just take reasonable precautions
Re Kingston Cotton Mill Co (1896). What happened? - page 191
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A claimant must have a quantifiable loss. Examples include:
Personal injury
Financial loss directly connected to personal injury. Eg loss of earnings
Damage to property
What is the ‘but for’ test?
If the claimants loss would not have occurred but for the defendants conduct - then the defendant has cause the loss
Vica versa
Even where causation is proved, a negligence claim can still fail if:
The damage caused it too remote
The most common remedy for loss or damage suffered due to an auditors negligence is?
Financial compensation
Auditors should take measures to prevent negligence and hence avoid litigation claims being raised against them.
These approaches should include:
Formalising the basis of the engagement contract
Identifying the risk profile of potential clients
Ensuring a sound audit approach is followed
(Ensuring a sound audit approach is followed)
Compliance with quality control procedures will also reduce the likelihood of litigation. Such as:
Ensuring audit staff are adequately trained and supervised
Ensuring that documentation standards are adhered to
Ensuring all work is reviewed effectively
What does a liability limitation agreement do?
Limits the amount of liability owed to a company by its auditor in respect of
any negligence, default, breach of duty or breach of trust,
occurring in the course of the audit for which the auditor may be responsible in relation to the company
What is an LLA?
Liability Limitation Agreement
The CA 2006 imposes a number of requirements on the use of an LLA:
Auditors can only limit liability by LLA for a particular, specified financial year
Each LLA must be authorised by shareholders
Details of an LLA must be disclosed in the annual accounts
What is a prima facie case?
One where the pursuer has established, on the balance of probabilities that they were owed a duty of care
And the defendants failure to achieve standards resulted in a loss or injury
The most commonly relied upon defences in a negligence case are:
Contributory negligence
Volenti non fit injuria
Ex turpi causa
What is contributory negligence
Where the claimant has aggravated or exacerbated the injury or damage which they have suffered
What is Volenti Non Fit Injuria?
Where it can be proved that a claimant consented to a risk in a situation where a defendants actions carry an inherent risk.
Then the defendant will have a defence
In order for a defendant to be successful with Volenti non fit injuria, what must they prove?
That the claimant was fully aware of the risks and they consented to them
If Volenti non fit Injuria is established, what will it provide?
The defendant with a complete defence
They will be exonerated from paying damages altogether
What is Ex turpi causa?
The claimant is unable to pursue legal remember where this arises from their own illegal act
Moore Stephens v Stone & Rolls (2009). What happened? Page 197
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There are certain quality control measures firms can put in place to try to avoid negligence claims including:
Formalising the basis of the engagement contract
Identifying the risk profile of potential clients
Ensuring a sound audit approach is followed
