Module 10 Auditor Responsibilities Common Law Flashcards
What is negligence?
A breach of a legal duty of care which results in loss or damage being suffered by another party
What is Caparo Industries PLC v Dickman and others 1990?
It established the tripartite test of duty of care and principle of proximity and established that auditors can only be sued for negligence by the body of shareholders as a whole:
The economic loss arising would have to be reasonable forseeable
There need to be a close and direct relationship between defendant and claimant
The imposition of a duty of care would have to be fair, reasonable and just
What is AWA limited v Daniels, trading as Deloitte Haskins & Sells & Ors 1992
This set out the duty of care auditors have towards their client as per the terms of the engagement letter (including relevant auditing standards)
What is Hedley Byrne Ltd v Heller & Partners 1964
This set out that a duty of care could be owed between parties in a special relationship to take reasonable steps to minimise the risk of pure economic loss
For a special relationship to exist:
One person must be acting in a professional or expert capacity
Other person relies on the advice they are given
Person giving the advice knows or should know that their advice will be relied on
What is Royal Bank of Scotland plc v Bannerman Johnstone Maclay and others 2002
It resulted in ICAEW issuing a technical release recommending that auditors who wish to manage the risk of liability to third parties use a disclaimer in their audit reports as this did not exist in Bannerman case
What is Barclays Bank v Grant Thornton 2015
This tested the Bannerman technical release and found it to be valid
What are the factors that can be considered in determining whether a duty of care has been breached
Professional skilled person - A person with a particular skill wil be judged by reference to what a reasonable person with those same skills would do
Probability of injury - if the risk is high then the reasonable person is expected to take greater care
Seriousness of the risk - Take your victim as you find him applies so that in the case of vulnerable person the level of care required in increased
Practicability and cost - If cost to eliminate all risk is excessive compared to the risk of injury arising then there is no breach of duty if all steps are not taken
What is Re Kingston Cotton Mill Co (1896)
Reasonable person test
Established that a breach of duty of care can be defined as failure to exercise the level of reasonable skill, care and caution that is appropriate to a particular set of circumstances
Auditor must do their job with compliance to applicable law and auditing regulations
What is the “but for” test
Test used to determine liability, if the claimants loss would not have occured but for the defendants conduct then the defendant has caused the loss
What is remoteness of damage?
Even when causation is proved, “but for” test passed”, a negligence claim still fail if the damage caused is too remote
No damage can be claimed except as naturally and directly arise out of the wrong done and the eventual outcome was forseeable
What is limited liability agreement?
LLA limits the amount of liability owed to a company by its auditor
Companies act 2006 imposes requirements on the use of a LLA
Auditor can only limit liability by LLA for a particular, specified financial year
Each LLA must be authorised by the shareholders
Details of a LLA must be disclosed in the annual accounts
LLA does not change an auditor’s statutory responsiblilities, duty of care or the need to follow professional standards
What are the defences in a neglience case?
Contributory negligence - Defence may be relied upon where the claimant has aggravated or exacerbated the injury or damage which they have suffered by their own negligence
Volenti no fit injuria - If it can be proved that the claimant consented (implied or expressly) to a risk in a situation where a defendants actions carry an inherent risk then there is a defence.
Ex turpi cause - A claimant is unable to pursue legal remedy where this arises from their own illegal act
What is Moore Stephens v Stone & Rolls (2009)
The decision provided clarity of the scope of duty of care owed by auditors and the use of the defence ex turpi cause where fraud arises as a result of actions of a sole controller of a company
