professional liability Flashcards
how can auditors be found guilty of crimes
financial market abuse offences like insider dealing
criminal offences like tipping off or failing to report money laundering
on what basis can auditor be sued
-contractual relationship w client, can be sued if breached contract
-also for negligence
to succeed in an action for negligence, an injured party must prove 4 things
-a duty of care exists which is enforceable by law
-duty of care was breached
-loss (financial) was caused to the injured party
-the harm was not too remote a consequence of the breach
defence against negligence claims
demonstrate that quality standards and ISAs were followed.
can third parties other than client sue auditor for negligence
third parties have no contract with audit firm
however, circumstances might create a duty of care.
duty of care must be proved in addition to other 3 negligence claim requirements
how to limit auditor’s liability
audit firms are unable to get sufficient insurance cover to meet potential level of claims. even if other parties share the responsibility (like directors) it will not be enough
-PII: professional indemnity insurance- it is insurance against civil claims made by clients and third parties
-Fidelity guarantee insurance: insurance against liability arising through fraud or dishonesty by any partner, director or employee
why is insurance important for auditors?
-so audit firm doesn’t find itself with a liability that is too big to pay
-client can be compensated for error, in case compensation is greater than resources of the firm.
acca policy regarding insurance
-all firms which hold practising and auditing certificates must have PII with a reputable insurance company
-if firm has employees, it must also have FGI
-insurance must cover all civil liability of partners, directors,employees
-must continue till 6 yrs after a member stops practicing
how to reduce chances of litigation
have good procedures over:
-client acceptance
-quality controls
-performance of audit work
-compliance with standards
also:
incorporation
LLPs
Liability limitations
incorporation
would protect partners from personal bankruptcy
-however firm itself could be forced into liquidation
-tax implications
-publish accounts, get audited
LLPS
in UK
flexibility ans tax status of a partnership with limited liability for members
the partnership, but not its members will be liable to third parties
personal asset of negligent partner will be at risk
liability limitations
make an agreement with client
proportionate liability: allow claims arising from successful negligence claims to be split between the auditors and directors of the client company. split is determined by a judge on basis of whose fault it was. this requires approval of SH
capping liability: set a max limit that auditor will have to pay under any claim
expectation gap
difference between expectation of those who rely upon auditor report concerning audit work performed and the actual work performed.
arises due to misunderstanding of public of resp of mgmnt, auditor and the scope of audit. eg. auditors duty to prevent and detect fraud,m auditor is liable for any errors in FS.
HOW TO NARROW EXPECTATION GAP
educate users: auditors report includes explanation of auditor and management responsibilties
also KAM
also in engagement letter clearly define
extend auditor reponsibilites
why is extra work from auditors little likely to affect fraud risk
-most frauds involve management
-more than half frauds involve misstated financial reporting but not misappropraiation of funds
-management fraud is unlikely to be found in FS audit
-far more is spent on investigating and prosecuting fraud in a company than on its audit
