The auditor's liability for audited financial statements (original) (raw)
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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...
Re-examining the basis of auditors ' liability in Nigeria and the United Kingdom
In Europe and North America, negligence claims against fi rms of accountants, solicitors and other professionals are increasingly common. The law of negligence is in constant development, as major cases come to trial and new statutes are enacted on the subject. The auditing function of accountants has attracted more attention in recent times because of the failings of international corporate brand names amidst allegations of fraudulent accounting, auditing and directors ' abuse of offi ce. A legal response to these failings is an examination or re-examination of the rules on audit responsibilities, monitoring and the basis of liability for breach of statutory duties and negligent misstatements. This article examines the legal framework delineating auditors ' responsibilities and potential liabilities in the United Kingdom and under the Nigerian Companies and Allied Matters Act 1990, with a view to prescribing an approach that will ensure effective compliance and discharge of responsibilities owed to all persons who may conceivably rely on fi nancial statements and the auditors ' certifi cation of accuracy. It advocates a stricter regime of civil liability for auditors in meeting increasing challenges posed by several audit failures and scandals worldwide. The article submits that existing statutory framework for auditors ' liability needs to be supplemented and advanced by common law formulations. It argues that a legal regime, which absolves auditors ' liability in respect of a careless audit unless it so happens that the company itself suffers loss, is absurd. In reality, it contends that a company ' s annual report containing the fi nancial statements of a company ' s performance as audited forms the bedrock of informed investment decisions by existing shareholders and prospective investors. For existing shareholders, it provides an analytical basis for the evaluation of the company and thereby infl uences the decision to sell or hold or even to make further purchases of the company ' s stock; moreover, for investment analysts, advisers and investors, it encompasses the most readily obtainable certifi ed performance record of the company. Therefore, it is only reasonable that it will be relied upon by professional advisers and ultimately in investment decisions. To limit the relevance of fi nancial statements to its ' accountability role ' for
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
IIMA Working Paper Series, 2020
Gross negligence is a severe form of negligence. Its severity has been characterized using the presence of a mental element or mens rea accompanying the negligent act. Within the context of professional negligence, gross negligence is important as it constitutes professional misconduct. For auditors, a finding of professional misconduct through disciplinary proceedings can result in suspension or expulsion from the profession. The Securities and Exchange Board of India also uses this concept to determine whether an auditor has violated any securities regulations. Given the implications of a finding of gross negligence on the practice of an auditor, this paper seeks to examine the legal standard in detail. The paper examines all reported High Court decisions from 1950s till 2019 and finds that the standards applied by the High Courts have been inconsistent. In the absence of any precedent from the Supreme Court of India that details what comprises gross negligence in the context of auditors, the inconsistent approach of the High Courts poses a problem. The Supreme Court decision in the P.K. Mukherjee case (1968) dealt with an auditor’s misconduct, however, it did not examine the question of gross negligence. This paper offers a starting point for a discussion to minimize the uncertainty currently associated with auditors’ liability for professional misconduct, especially hoping to assist the newly established the National Financial Reporting Authority in its decision-making process.
Potential Litigation Against Auditors for Negligence
The Brooklyn Journal of Corporate, Financial and Commercial Law, 2011
This Article addresses potential litigation against auditors for negligence, an especially important topic because such litigation is likely to increase in future years. Several reasons exist for more litigation on negligence. First, in the 2010 Supreme Court case reviewing the status of the Public Company Accounting Oversight Board (PCAOB), both sides accepted the PCAOB as a government regulatory agency, at least for some purposes. This implies that the auditing standards as approved by the Securities and Exchange Commission (SEC) should have some legal status. Second, three major reforms of relevant professional standards are occurring. Because the new standards leave more room for judgment, they are likely to increase litigation against auditors. Third, the auditing industry's fundamental duties of care to avoid negligence are extensive and illustrated primarily by inspection reports and enforcement cases presented by the PCAOB. Fourth, recent attempts to limit auditors' liability have failed. Thus, real steps by the auditing profession are needed primarily to raise the quality within the profession to help limit potential future litigation against auditors. 1. The U.S. Supreme Court has even summarized the important role of auditing. See United States v.
FRAUD AND ERROR. AUDITORS' RESPONSIBILITY LEVELS
2009
Are auditors responsible for detecting fraud in the companies they inspect? Most of the public thinks they are. Auditors often demur. The auditors' duties for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing. This paper reports the findings of a survey that explores the financial report users' perceptions on the extent of fraud in Romania and their perceptions of auditors' responsibilities in detecting fraud and the related audit procedures. This study also finds that there is a widely held misperception of the objective of an audit. This is because, among respondents, a much higher expectation has been placed on the auditors' duties in detecting and reporting fraud than statute or audit standards require. The results of the study show unquestionably the existence, with respect to detection of fraud, of a gap between the perception of the respondents and the present statutory requirements of auditors.
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.
Auditor Liability: The Case for Limitation
The Company Lawyer, 2010
Accountancy firms have long argued that they, like other providers of a service, be allowed to contractually limit their liability. In this two-‐part article, the overall debate surrounding the limitation of auditor liability will be examined, with this first part discussing the arguments put forward by auditors to justify the introduction of some form of limitation.