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business law notes related to auditors liabilities and legal case
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Various liabilities of auditor with reference of legal case:Auditors are potentially liable for both criminal and civil offences. The former occur
when individuals or organisations breach a government imposed law; in other
words criminal law governs relationships between entities and the state. Civil law,
in contrast, deals with disputes between individuals and/or organisations.
Criminal offences
Like any individual or organisation auditors are bound by the laws in the countries
in which they operate. So under current criminal law auditors could be prosecuted
for acts such as fraud and insider trading.
Audit is also subject to legislation prescribed by the Companies Act 2006. This
includes many sections governing who can be an auditor, how auditors are
appointed and removed and the functions of auditors.
One noteworthy offence from the Companies Act is that of ‘knowingly, or recklessly
causing a report under section 495 (auditor’s report on company’s annual
accounts) to include any matter that is misleading, false or deceptive in a material
particular’ (s.507).
This means that auditors could be prosecuted in a criminal court for either
knowingly or recklessly issuing an inappropriate audit opinion.
Civil offences:
There are two pieces of civil law of particular significance to the audit profession;
contract law and the law of tort. These establish the principles for auditor liability
to clients and to third parties, respectively.
Under contract law parties can seek remedy for a breach of contractual obligations.
Therefore shareholders can seek remedy from an auditor if they fail to comply with
the terms of an engagement letter. For example; an auditor could be sued by the
shareholders, which was the case in the PwC settlement to Tyco shareholders
referred to above.
Under the law of tort auditors can be sued for negligence if they breach a duty of
care towards a third party who consequently suffers some form of loss.
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