Auditors accumulate and evaluate information to be able to determine whether the financial reports of a given company complied with legislative requirements and established criteria. An auditor therefore determines the credibility of financial information so that the correct use of it in business and investment decisions can be made. Auditors have legal duties attached to their activities which they are expected to uphold. A breach of the legal duty which is imposed and fixed by law due to careless acts constitutes what is termed as negligence. This makes it to be based on conduct rather than any form of agreement. A tort of negligence therefore is only committed when actionable damage is sustained, and this is not only by carelessness but by inflicting damage carelessly in situations where the law recognizes a duty to be careful. Negligence is hence established if the conduct was careless and there existed a causal relationship between the damage and that conduct. A close look at it is a situation where the conduct was foreseeable to inflict the damage on person harmed.
Negligence statements provided by company auditors can result to pure economic loss. Internal auditors check the accuracy of the financial information and provide an opinion whether the information is true and fair according to the accounting standards and common law. They are liable to external users of financial information since external users rely on audited statements to make investment decisions hence the need of the opinions to be unbiased and remain independent. Therefore, it is their legal duty to provide an assurance to all audited statements users that the material is not of fraud, its reliable and lacks irregularities. Conclusion by the auditor that the information is fairly stated as per the accounting standards makes them liable if they are found to have been materially misstated.
Table of Contents
1. Introduction
2. Duty of care
3. Pure economic loss
Objectives and Topics
The primary objective of this work is to examine the legal liability of company auditors regarding the tort of negligence. It explores how professional duties, the requirement of independence, and the concept of a duty of care towards external users form the basis for establishing liability in cases of professional failure and economic loss.
- Legal obligations and professional standards for auditors.
- The intersection of negligence law and financial auditing.
- The role of reasonable foreseeability in establishing liability.
- Consequences of pure economic loss for external users of audited reports.
- The importance of independence and unbiased reporting in minimizing legal risks.
Excerpt from the book
Duty of care
Auditors are liable and can be sued due to the fact that they automatically owe external users of audited statements legal duty of care. External financial users completely rely on auditors and for the fact that they have been employed by the company are required to provide justified opinions. They therefore owe a duty of care in their process of auditing should not cause physical damage to the property of the external users or an economic loss due to their negligent acts. Reasonable care should be taken to avoid acts or omissions that will affect users. The duty of care is owed for any reasonable foreseeable negligently-inflicted loss. This calls in for the question whether the auditor acts or omissions were directed and influenced by the policies provided by the company or organization for an aim of convincing the third party in anticipation of a decision that can result to gains or benefits (Kelly, Hayward, Hammer, & Hendy, 2013). Essentially, auditors should remain independent and act without the bias of the company. Interference of the company in decisions during auditing process relieves the auditor of any liability as a result of the audited information to the third party. Consider the case of Hedley Byrne and Co. verses Heller and Partners in 1963 where there was an establishment or damage recovery as a result of reliance on negligent misrepresentations.
Summary of Chapters
1. Introduction: This chapter introduces the role of auditors in verifying financial information and defines the legal concept of negligence within the context of professional conduct and duty.
2. Duty of care: This section details the legal obligation auditors have towards external users and explains how failures to meet standards can lead to liability for negligent acts or omissions.
3. Pure economic loss: This chapter focuses on financial damages incurred by users relying on audited reports and clarifies the conditions under which auditors are held liable for such losses.
Keywords
Auditor, Negligence, Duty of Care, Financial Statements, Liability, Pure Economic Loss, Auditing Standards, Reasonable Foreseeability, Independent Opinion, Tort Law, Third Party Reliance, Fraud, Professional Skills, Risk Management, Accountability.
Frequently Asked Questions
What is the core focus of this publication?
The work focuses on the legal principles governing the tort of negligence as it applies to company auditors, specifically regarding their liability toward external users of financial reports.
Which central topics are addressed?
Key topics include the auditor's duty of care, the distinction between acts of omission and commission, the legal implications of pure economic loss, and the necessity of maintaining auditor independence.
What is the primary research objective?
The objective is to analyze how and when auditors can be held legally liable for negligence if their audit opinions, which are relied upon by third parties for investment decisions, are found to be inaccurate or misleading.
Which methodology is applied?
The publication employs a legal-analytical approach, reviewing common law principles, accounting standards, and landmark legal cases to interpret how negligence is established in a professional auditing context.
What is covered in the main body?
The main body examines the legal definition of duty of care, the criteria for establishing liability, the recovery of pure economic loss by external parties, and the impact of professional standards on auditor behavior.
Which keywords characterize the work?
The work is characterized by terms such as Auditor, Negligence, Duty of Care, Liability, Pure Economic Loss, and Auditing Standards.
What is considered an "audit failure" in this context?
An audit failure occurs when an auditor provides an erroneous opinion that fails to meet Generally Accepted Auditing Standards (GAAS), thereby causing foreseeable harm to those relying on the report.
How does the case of Hedley Byrne and Co. verses Heller and Partners relate to auditor liability?
It serves as a legal precedent demonstrating that damage recovery can be established when a party relies on negligent misrepresentations made by a professional.
Why is auditor independence crucial for limiting liability?
Independence ensures that the auditor provides an unbiased assessment; interference by the company in the auditing process can potentially alter the auditor's liability by compromising this objectivity.
What is the consequence for an auditor when their reports cause pure economic loss?
The auditor may be held liable if a plaintiff can establish that the harm was reasonably foreseeable and that the auditor failed to exercise the required care and professional skill expected of their position.
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- Kelly Adam (Autor), 2013, The Law of Negligence: Company Auditor, Múnich, GRIN Verlag, https://www.grin.com/document/267617
