AUDITORS' LIABILITY AND ITS IMPACT ON THE EUROPEAN FINANCIAL MARKETS (original) (raw)
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Auditors' Multi-Layered Liability Regime
European Business Organization Law Review, 2012
7 The previous campaign had led to the passage of the Private Securities Litigation Reform Act ("PSLRA"): see infra notes 53 and 83 and accompanying text. 8 See supra note At European Union level, the Commission recommended Member States to adopt liability caps in order to protect 5. 9 The core issue was that these powerful weapons could be fired at auditors, the traditional "deep-pocket" of financial scandals ending up in catastrophic insolvencies, all too easily. See Comm'n on the Regulation of U.S. Capital Mkts. in the 21st Century, Report and Recommendations 28-31 (2007),
The Liability of Auditors Beyond Their Clients: A Comparative Study',(2001)
McGill Law Journal
The constant evolution of the importance of auditors’ functions during the twentieth century brought with it considerable scholarship on their responsibility. Indeed, confronted with the insolvency of a company in which they have invested, shareholders, investors, and offerors increasingly seek to recover their economic loss from auditors who, solvent and insured, were negligent in auditing the financial statements of the company in question. Accordingly, the study of the liability of an auditor towards third parties has a growing importance. In this article the author analyzes comparatively auditors’ liability under the common law of England and Canada and under the civil law of France and Quebec. Specifically, she attempts to show how courts use the duty of care in the common law and causality in the civil law to limit this liability. Furthermore, she pays particular attention to the influence of Canadian, English, and French law on the law of Quebec. The author not only delineates this influence, but also comments on the extent to which the law of Quebec may legitimately take inspiration from the English and Canadian common law and the civil law of France in the area of auditors’ liability to third parties.
The Liability of Auditors beyond Their Clients: A Comparative Study
2001
The constant evolution of the importance of auditors’ functions during the twentieth century brought with it considerable scholarship on their responsibility. Indeed, confronted with the insolvency of a company in which they have invested, shareholders, investors, and offerors increasingly seek to recover their economic loss from auditors who, solvent and insured, were negligent in auditing the financial statements of the company in question. Accordingly, the study of the liability of an auditor towards third parties has a growing importance. In this article the author analyzes comparatively auditors’ liability under the common law of England and Canada and under the civil law of France and Quebec. Specifically, she attempts to show how courts use the duty of care in the common law and causality in the civil law to limit this liability. Furthermore, she pays particular attention to the influence of Canadian, English, and French law on the law of Quebec. The author not only delineate...
The EU law on auditing and the role of auditors in the global financial crisis of 2008
International Journal of Disclosure and Governance, 2013
In September 2011, the European Union Commissioner Michel Barnier explained that there are weaknesses in the way the audit sector works today and the crisis highlighted them . Such weaknesses were not detected for the fi rst time: a few years earlier the problems of the audit sector emerged when Enron collapsed and the chicanery of its auditor Arthur Andersen was revealed to the markets. Since then, auditors and audit fi rms, namely, the Big Four have been subject to the long standing debates not only in the academic world but also in a number of European laws and regulations. This article examines the role of auditors in the global fi nancial crisis of 2008 and whether they actually failed in their role.
Journal of International Accounting, Auditing and Taxation, 2010
This study compares the status of auditors' legal liability to third parties in seven countries. It analyzes recent legislation, regulation, and case law as well as pronouncements from national accounting and auditing bodies. With the increasing internationalization of capital markets and audit firms, an understanding of auditor liability on a global basis is important. Our findings show that common law countries (the United States, Canada, the United Kingdom, Australia, and New Zealand) have enacted legislative reforms that directly or indirectly increased auditors' liability. In contrast, civil law countries (Germany and France) did not mandate legislative or regulatory reforms.
Auditor liability to third parties in Spain and the United States: a comparative study
2015
In the aftermath of the litany of corporate scandals we have seen, few subjects have aroused so much passion in the world of accountancy as that of auditor?s liability. Now the study and understanding auditors? liability to third parties cross nationally is not only fashionable but also a business imperative given the globalization of capital, corporations, and audit practice. This study explores the doctrinal differences in third party liability claims by comparing the status of auditors? liability to third parties under the common laws of the United States and the civil law of Spain. It will examine how the common and civil law courts faced with auditor liability claims, had to strike a balance between two potentially conflicting interests: the public?s interest in having an independent and competent review of financial statements and the interest the auditing profession has in carrying out its duties without the fear of a potentially overwhelming liability. Specifically, it looks...
AUDITOR LIABILITY AS PURE ECONOMIC LOSS: AN ASSESSMENT OF COMMON LAW AND CIVIL LAW PERSPECTIVES
Article, 2017
Under common law, legal claims brought for compensation for damages caused by negligent acts are tried under the principles of tort of negligence. But audit liability is only a negligent misstatement, and liability for negligent misstatement is not an autonomous category within the law of negligence. Therefore, audit liability is usually analyzed in the wider context of economic loss. It is trite law that economic loss is formerly not recoverable under common. Does this apply to a civil law jurisdiction like Spain as well? The following paragraphs will try to answer this question by comparing the application of economic loss rule under the tort laws of civil and common law systems as represented by Spain and the United States respectively. It is argued that the mutual concern common law and civil law courts share, of an open-ended liability, led to the invocation of policies like the concept of duty in case of common law and causation for civil law to bring liability exposure to a reasonable limit. Likewise, attention will be given to the uncertainty regarding the prerequisites for compensation of economic loss and the lack of consistent framework for determining recoverability. It is concluded by the contention that the economic loss rule is a necessary mechanism that serves the ends of the law and society as well.
Intersections of law and accountancy: Unlimited auditor liability in the United Kingdom
Accounting, Organizations and Society, 1998
In recent years, considerable pressure has grown within the British auditing industry for limitation of liability arising from negligent misstatements in audit reports. Under British company law, auditors are forbidden from contracting with companies for their liability to be restricted. This legal provision was introduced in the Companies Act 1929 as a byproduct of legislation relating to directors' liability. The paper explores the background to this legal provision, observing that auditor liability cannot be viewed as a selfcontained matter of interest only to a limited community. Attitudes to auditor liability have been shaped against a background of changes in the law of negligence, some, but by no means all, arising from cases involving auditors. Moreover, changing concepts of the position of the auditor within corporate governance structures have at different times encouraged and discouraged the assimilation of the legal treatments of auditors and directors. These concepts themselves reflect differing notions of what actually constitutes the "company": a collectivity of shareholders or a separate entity controlled by directors. These notions emerged against a background of corporate failure and the need to allocate losses among various parties with different degrees of culpability for failure. However, legal developments do not account by themselves for changing attitudes within the auditing industry towards unlimited liability; acceptance of full responsibility for one's statements, adopted as a badge of professional status, has more recently been seen as inhibiting the commercial development of British auditing. 8 1998 Elsevier Science Ltd. All rights reserved
Free, Clinton (1999) "Limiting Auditors’ Liability,"Bond Law Review: Vol. 11: Iss. 1, Article 7., 1999
Much of the previous literature relating to auditor liability has focused on individual issues in isolation. This paper aims to integrate the key issues, considering the rationale, cost and implications of the audit liability regime and overviewing the current calculus used to assess damages and reforms suggested to limit liability. It is submitted the current liability regime as it applies to auditors is too severe, inequitably imposing substantial costs on auditors. Consistent with recent literature, it is argued that a better solution would appear to be the introduction of a proportional liability regime accompanied by a mandatory requirement that directors hold professional liability insurance as well as reform to the calculus used to assess damages.
Audit Standards and Auditor Liability: A Theoretical Model
Accounting and Business Research, 1996
The business of auditing is heavily regulated. Auditor regulation exists through licencing, professional standards and liability. The auditor's liability for losses to financial statement users from audit failure is subject to a test of negligence. What constitutes due audit care is however not generally well specified. Furthermore, reviews of litigation against auditors concluded that compliance with professional audit standards does not always act as a complete defense to allegations of negligence. The current situation can be described as one where (ex ante)-from the point of view of the auditor-uncertainty exists about the 'legal' standard of due audit quality (as seen by the courts in the event of litigation). This uncertainty about legal standards fundamentally affects audit behaviour in ways that are not immediately intuitive. This paper draws on insights from the economics and law literature [ e.g. Kolstadt et al. (1990), Shaven (1984a, 1984b, 1987), Calfee and Craswell (1984, 1986)] and provides an analysis of the impacts of uncertainty about auditor negligence on the produced level of audit quality and on audit fees. It is shown that uncertainty about the legal standard of due audit quality is fundamental to understanding audit quality supplied and that an auditor subject to an uncertain negligence rule will over or under comply with that standard. This uncertainty is the explicator of an insurance component in audit fees. A surprising insight is that a large uncertainty about the legal standard of care can reduce rather than increase the quality of audit work supplied and increase the insurance component, when relying on insurance premia is more effective than direct expenditure in reducing risk. The effect of the imposition of ex ante precise audit quality standards, in combination with an uncertain negligence rule is discussed. Since the influence of ex ante standards is indirect through its effect on ex post liability, auditing standards cannot be analysed independently of legal standards, and they are an irrelevance in a world in which the legal standard of care is clear. Audit standards affect audit behaviour only if legal standards of care are unclear, and they help to clarify the legal standard. An effective combination is for ex ante standards to be set below the ex post standards of care so that they provide a lower bound on acceptable work. Too far below legal standards, audit standards would have no impact as far as operational decisions were concerned, although they would have the benefit of being no imposition and a costless irrelevance.