Essays on Auditor's Legal And Professional Liability Essay

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Auditor’s legal and professional liabilityThe term auditor’s responsibility and auditor’s legal liability often are confused by non auditors. The distinction is subtle and yet it must be drawn in order for auditors and non auditors to communicate with each other. One of the most ideal ways in which to understand the relationship between responsibility and liability is to think of responsibilities as being professional duties and legal liabilities as relating to society’s means of enforcing adherence to those professional duties. What this basically means is that these are ways in which compliance with professional standards and providing compensations to victims of wrongful conduct (Grubbs and Ethan, 2007).

The concept of auditor’s responsibility usually arises in relation to two basic contexts: responsibility in relation to what, and responsibility in relation to whom. Answers to both of these questions can be gauged primarily in the technical and the ethical standards of the public accounting profession; occasionally these are specified in state and federal statues and court decisions. All of these sources provide guidance to auditors on how to conduct audits with due professional care and thus meet professional responsibilities and on other duties that auditors owe their clients and parties.

There have been hundreds of accounting liability cases that have been litigated over the past few years and the flow of this litigation does not seem to be likely to stop anytime soon. Accountants perform an increasingly diverse variety of functions for their clients from traditional accounting services to full range of management consultation functions. Negligence has been defined as “any conduct that is careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort (that is, to those who the auditor could reasonably foresee would rely on the auditor’s report), owed to another person or persons”, (Liability of Auditors).

Duty of care arises in cases where a contract is involved or when there is a tort of negligence involved. The conditions that are required or a case of negligence to hold ground include negligence with respect to a duty of care, there is a loss or damage suffered or when the loss is quantifiable.

It is true that the numbers have been increasing over the years; there are few landmark cases that can be observed in details in order to create an outline of the existing trend in this kind of jurisdiction and how it has evolved. The first case that one can take a look at is the Caparo Industries vs. Dickman, [1990] 2AC 605, House of Lords, which was centered round the liability of the auditors to the purchasers of shares.  In the case the plaintiff’s company commenced to purchase shares after its Directors had publicly announced the year's results based on the defendant audit (Sahu, 2001).

Following the posting of the audit to share holders and the shareholders meeting, the plaintiff purchased more shares and eventually made a successful claimant bid. It was however found that the stock was over valued, and the auditors were sued by the plaintiff or negligence. The claim was that the auditors had been negligent in basing their audit on what was allegedly deceptive misrepresentation by the Directors of the Company. The plaintiffs, by virtue of the fact that they were already directors on the Board had access to the report that was prepared by the auditors and relied on the audited accounts in buying more shares.

This however turned out to be false the profits were not as high as projected leading to a fall in the share prices and an overall economic loss for the plaintiffs. The case dealt with important issues in the law of tort (Hicks and Goo, 2007). In the context of company law, the jurisdiction refuses to extend the liability of the auditors to third parties.

The underlying principle was that an auditor making a negligent statement is liable only if a duty of care is owed to the person who relied on it thereby suffering loss, or if there was in place a relationship of sufficient proximity between the plaintiff and the defendant i. e. the auditor knew that the statement would be passed to the defendant individually or as a member of a class of persons in connection with a particular transaction or type of transaction, and that the plaintiff would be very likely to rely on it while making a decision bout whether or not to go through with the transaction in question.

Third, it was also decided that the court must consider be sure that the imposition of duty is fair and reasonable. It was also recognized in the case that such tests are overlapping and are therefore a little more than labels thus being inapplicable to the process of accurately defining whether or not liability is to be established.

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