This dissertation recommends that the laws governing the liability of the auditor in South Africa be amended to ensure a sustainable audit function and accordingly a competitive market for audit firms. These amendments must take the form of (a) introducing a monetary cap or ceiling on the quantum of damages that may be claimed by a plaintiff in the event that an auditor is found guilty of a breach of his or her legal duties and obligations in contract and in delict, (b) the provision for auditors to enter into contracts with their clients to limit the quantum of damages that may be suffered by the client as a result of the auditor’s breach of the contract with his or her client, and (c) introducing legislation which, will protect audit partners from personal liability if they did not participate directly in another partner's misdeed or fraud. It is submitted that this dissertation should be viewed as a Revised Project 70 where the South African Law Commission in 1988 investigated the desirability of the limitation of professional persons and the possible regulation thereof by legislation [the conclusion was that there was no justification to limit the liability of any category of professionals by legislation]; which is updated with and including the fundamental and paradigm shifting changes that have taken place in the global markets since then regulators in Australia, United States of America, United Kingdom, Austria, Germany, Greece, Belgium, Slovenia and Australia have removed the prohibition on auditors limiting their liability in relation to work conducted within the statutory audit function. This dissertation explores and analyses whether these significant changes to the legal systems in the United States of America, European Union and Australia would be considered appropriate for implementation in South Africa. The main component of this dissertation is constituted by a comparative analysis of the different civil liability systems for auditors which currently exist in Australia, Germany, South Africa, the United Kingdom and the United States of America. The objective of the comparative analysis was to determine to what extent the different systems of civil liability of auditors which exist in Australia, Germany, United Kingdom and United States of America could be implemented in South Africa. [...]
Table of Contents
CHAPTER 1 – INTRODUCTION
1. OVERVIEW
2. THE CASE FOR REFORM
2.1. Project 70 - Limitation of Professional Liability
2.2. Further Information
2.3. Financial Crises
2.4. Inherent Limitations of an Audit
2.5. Importance of auditor liability
3. RESEARCH PROBLEM AND RESEARCH QUESTION
3.1. Concerns
3.1.1.Concern 1
3.1.2.Concern 2
3.1.3.Concern 3
3.1.4.Concern 4
3.2. Summary
4. CONTRIBUTION TO KNOWLEDGE IN THE AREA OF RESEARCH
5. AIMS AND OBJECTIVES
6. RESEARCH METHODOLOGY
7. ASSUMPTIONS OF THE STUDY
8. LIMITATIONS OF STUDY
9. INTERNATIONAL JURISDICTIONS
9.1. Australia
9.2. Germany
9.3. United Kingdom
9.4. United States of America
10. STRUCTURE OF DISSERTATION
10.1.Chapter Two: Context and Policy Analysis
10.2.Chapter Three: Regulatory Framework: South Africa
10.3.Chapter Four: The Legal Liability of Auditors in South Africa
10.4.Chapter Five: Regulatory Framework: International Jurisdictions
10.5.Chapter Six: The Legal Liability of Auditors in International Jurisdictions
10.6.Chapter Seven: Comparative Analysis
10.7.Chapter Eight: Analysis of Proposals
10.8.Chapter Nine: Conclusions and Recommendations
11. SUMMARY
CHAPTER 2 - CONTEXT AND POLICY ANALYSIS
1. OVERVIEW
2. THE AUDIT PROCESS
3. AUDITOR LIABILITY IN CONTEXT
4. POLICY ANALYSIS
5. SUMMARY
CHAPTER 3 - REGULATORY FRAMEWORK: SOUTH AFRICA
1. OVERVIEW
2. THE COMPANIES ACT, 2008
2.1. Appointment of Auditor
2.2. Rights and Restricted Functions of Auditors
2.3. Collective Actions
2.4. Annual General Meeting
2.5. Civil Action
2.6. Independence
3. THE AUDITING PROFESSION ACT, 2005
3.1. Registration of Individual Auditors
3.2. Registration of Firms as Registered Auditors
3.3. Termination of registration
3.4. Conduct by and Liability of Registered Auditors
3.4.1.Practice
3.4.2.Duties in Relation to Audit
3.4.3.Duty to report on irregularities
3.5. Limitation of Liability
3.6. Accountability of Registered Auditors
3.6.1.Inspections
3.6.2.Investigation of Charge of Improper Conduct
3.6.3.Disclaimer of Liability by an Auditor
4. SUMMARY
CHAPTER 4 - THE LEGAL LIABILITY OF AUDITORS IN SOUTH AFRICA
1. OVERVIEW
2. SOURCES OF THE AUDITOR’S DUTIES
3. CIVIL LIABILITY TOWARDS THE COMPANY
3.1. Performance Standard in Execution of Duties
3.2. Concept of Reasonable Care and Skill
3.3. What Constitutes Reasonable Care and Skill
4. RESPONSIBILITY FOR WORK OF TRAINEES
5. CLIENT COMPANY’S CIVIL REMEDIES AGAINST ITS AUDITOR
5.1.1.Actions Available
5.1.2.Breach of Contract
5.1.3.Delictual Action
5.1.3.1.Common Law Delictual Action
5.2. Breach of a Statutory Duty
5.3. Relevant Statutory Provisions
6. CIVIL LIABILITY TOWARDS THIRD PARTIES
6.1. General Principles For Common Law Delictual Liability
6.1.1.Conduct
6.1.2.Wrongfulness
6.1.3.Fault
6.1.4.Causation
7. STATUTORY DISPENSATION
7.1. When Liable and What Must be Established
8. AXIAM HOLDINGS LTD V DELOITTE & TOUCHE
9. CRIMINAL LIABILITY
9.1. Criminal Offence: Companies Act, 2008
9.2. Offences: Auditing Profession Act, 2005
10. SUMMARY
CHAPTER 5 - REGULATORY FRAMEWORK: INTERNATIONAL JURISDICTIONS
1. OVERVIEW
2. AUSTRALIA
2.1. Function of Auditors
2.2. Statutory Requirements
2.3. Who May Be an Auditor
2.4. Registration Requirements
2.5. Forms of Practice
2.6. Cancellation and Suspension of Registration
2.7. Auditor Independence
2.8. Auditing Standards
2.9. Annual General Meeting
2.10.The Duty to Detect and Report Fraud and Irregularities
2.11.Collective Actions
2.12.Quality Control
3. GERMANY
3.1. Function of Auditors
3.2. Statutory Requirements
3.3. Appointment of Auditors
3.4. Registration Requirements
3.5. Forms of Practice
3.6. Cancellation and Suspension of Registration
3.7. Auditor Independence
3.8. Auditing Standards
3.9. Annual General Meeting
3.10.The Duty to Detect and Report Fraud and Irregularities
3.11.Collective Actions
3.12.Quality Control
4. UNITED KINGDOM
4.1. Function of Auditors
4.2. Statutory Requirements
4.3. Appointment of Auditors
4.4. Registration Requirements
4.5. Forms of Practice
4.6. Cancellation and Suspension of Registration
4.7. Auditor Independence
4.8. Auditing Standards
4.9. Annual General Meeting
4.10.The Duty to Detect and Report Fraud and Irregularities
4.11.Collective Actions
4.12.Quality Control
5. UNITED STATES OF AMERICA
5.1. Function of Auditors
5.2. Statutory Requirements
5.3. Appointment of Auditors
5.4. Registration Requirements
5.5. Forms of Practice
5.6. Cancellation and Suspension of Registration
5.7. Auditor Independence
5.8. Auditing Standards
5.9. Annual General Meeting
5.10.The Duty to Detect and Report Fraud and Irregularities
5.11.Collective Actions
5.12.Quality Control
6. SUMMARY
CHAPTER 6 - THE LEGAL LIABILITY OF AUDITORS: INTERNATIONAL JURISDICTIONS
1. OVERVIEW
2. AUSTRALIA
2.1. Contractual Liability
2.2. Delictual Liability
2.3. Proportionate Liability of Auditors
2.4. Limiting The Quantum of Damages
2.5. Vicarious Liability
3. GERMANY
3.1. Contractual Liability
3.2. Delictual Liability
3.3. Proportionate Liability of Auditors
3.4. Limiting The Quantum of Damages
3.5. Vicarious Liability
4. UNITED KINGDOM
4.1. Contractual Liability
4.2. Delictual Liability
4.3. Proportionate Liability of Auditors
4.4. Limiting The Quantum of Damages
4.5. Vicarious Liability
5. UNITED STATES OF AMERICA
5.1. Contractual Liability
5.2. Delictual Liability
5.3. Proportionate Liability of Auditors
5.4. Limiting The Quantum of Damages
5.5. Vicarious Liability
6. SUMMARY
CHAPTER 7 - COMPARATIVE ANALYSIS
1. OVERVIEW
2. AUDITOR LIABILITY REFORM IN THE EUROPEAN UNION
2.1. Issues in the International Audit Market
2.2. Why the European Commission study is relevant to South Africa
2.3. Compulsory Insurance for all Auditor Liability Risks
2.4. Limiting Auditors' Liability
2.4.1.Proportionate Liability
2.4.2.Auditor liability caps on the quantum of damages
2.4.2.1.One single monetary cap
2.4.2.2.Cap depending on the company’s size
2.4.2.3.Cap depending on the audit fees charged to the company
3. COMPARATIVE ANALYSIS
4. SUMMARY
CHAPTER 8 - CRITICAL ANALYSIS OF PROPOSALS
1. OVERVIEW
2. CRITICAL ANALYSIS OF PROPOSALS
2.1. Models for Limiting Auditors’ Statutory Audit Liability
2.1.1.Model 1 - An Absolute Cap Set at x million Rands (Single Monetary Cap)
2.1.1.1.Author’s View
2.1.2.Model 2 - A Variable Cap: Level a Function of the Size of the Auditee
2.1.2.1.Author’s View
2.1.3.Model 3 - A Variable Cap: Level a Function of the Size of Audit Fees
2.1.3.1.Author’s View
2.2. Proportionate Liability
2.2.1.Author’s View
2.3. Limited Liability Agreements
2.3.1.Impact of Director’s Liability
2.3.2.Recommendations
2.3.3.Main Features of the Limited Liability Agreement
2.4. Limited Liability Partnerships
2.4.1.Recommendations
2.4.2.Main Features of the Limited Liability Partnership
2.5. Compulsory Professional Indemnity Insurance
3. SUMMARY
CHAPTER 9 - RECOMMENDATIONS AND CONCLUSIONS
1. OVERVIEW
2. REVIEW OF AIMS AND OBJECTIVES
3. SIGNIFICANT CONCLUSIONS
4. RECOMMENDATIONS
4.1. Insurance
4.2. Practice Structure
4.3. Limited Liability Agreements
4.4. Monetary Caps
5. GENERAL OBSERVATIONS
Objectives and Research Themes
This dissertation examines the urgent need to reform the legal liability regime for auditors in South Africa, arguing that current frameworks are outdated and detrimental to both the auditing profession and the national economy. The central research question explores whether international models of liability limitation—such as monetary caps, contractual liability agreements, and limited liability partnerships—should be implemented to maintain South Africa's position as a competitive global financial centre.
- Comparative analysis of auditor liability regimes in South Africa, Australia, Germany, the United Kingdom, and the United States of America.
- Evaluation of the impact of recent corporate and audit reforms on auditor legal exposure.
- Critical assessment of legislative proposals for limiting auditor liability, including monetary caps and contractual agreements.
- Examination of the "deep pocket" syndrome and its role in increasing litigation risks for large audit firms.
- Review of professional indemnity insurance availability and its significance for the stability of the auditing profession.
Excerpt from the Book
3.1.1.Concern 1
The first concern involves the question of insurance. The level of auditor liability insurance available for ‘higher limits’ from the commercial market has fallen sharply in recent years in terms of both the level and amount of insurance, and the conditions under which the insurance cover is effective. Louw submits in the case for reform in South Africa:
‘From time to time we hear of a multibillion Rand claim against an audit firm. In what other industry does an entity face potential exposures, in some cases, of up to hundreds of times the fee earned for performing that service, and being held jointly liable with the actual perpetrator of the crime? It's no wonder that professional indemnity capacity does not exist in the local market for the bigger audit firms. Large premiums are paid offshore each year to buy some protection against potential lawsuits, money that could be retained in South Africa to purchase cover locally if the full claims-potential was more certain. Few statistics exist for claims actually paid as these, if paid, are usually settled out of court after many years of legal wrangling and usually at a fraction of the original amount claimed. So why not bring certainty to the market by capping the liability for auditors when conducting an audit? Many other legal jurisdictions either have incorporated, or are in the process of incorporating, a limitation of liability into their national liability regimes. This would allow local insurers to quantify potential risk exposure and to offer liability protection locally. In addition, aggrieved parties could institute more realistic claims. Auditors may be inclined to settle more quickly thereby avoiding valuable court time.’
Summary of Chapters
CHAPTER 1 – INTRODUCTION: This chapter outlines the crucial need for reforming the auditor liability regime in South Africa by comparing it against international legislative developments.
CHAPTER 2 - CONTEXT AND POLICY ANALYSIS: This chapter explains the audit process, its importance, and the unique risks that expose auditors to indeterminate liability.
CHAPTER 3 - REGULATORY FRAMEWORK: SOUTH AFRICA: This chapter analyzes the primary legislative acts governing South African auditors, specifically the Companies Act 2008 and the Auditing Profession Act 2005.
CHAPTER 4 - THE LEGAL LIABILITY OF AUDITORS IN SOUTH AFRICA: This chapter details the civil liability of auditors, covering contract law, delictual actions, and the duty of care towards both clients and third parties.
CHAPTER 5 - REGULATORY FRAMEWORK: INTERNATIONAL JURISDICTIONS: This chapter provides a critical analysis of audit regulations in Australia, Germany, the United Kingdom, and the United States of America.
CHAPTER 6 - THE LEGAL LIABILITY OF AUDITORS: INTERNATIONAL JURISDICTIONS: This chapter compares specific legal liability concepts such as contractual and delictual liability across the selected international jurisdictions.
CHAPTER 7 - COMPARATIVE ANALYSIS: This chapter examines auditor liability reform in the EU and evaluates how these international models compare to the current South African legal framework.
CHAPTER 8 - CRITICAL ANALYSIS OF PROPOSALS: This chapter evaluates specific reform proposals, including various capping models and structural changes to audit firms.
CHAPTER 9 - RECOMMENDATIONS AND CONCLUSIONS: This chapter synthesizes the research findings and proposes specific legislative reforms to ensure the future viability of the auditing profession.
Keywords
Auditor liability, South Africa, corporate governance, professional negligence, limitation of liability, monetary caps, civil liability, Auditing Profession Act, Companies Act, third-party liability, audit firms, proportionate liability, insurance capacity, regulatory reform, legal accountability.
Frequently Asked Questions
What is this dissertation primarily about?
This work examines the current legal liability framework for auditors in South Africa and argues for the necessity of liability reform to protect the sustainability of the auditing profession.
What are the central themes of the research?
The core themes include the impact of indeterminate liability on audit firms, the comparative regulatory frameworks of international jurisdictions, and the potential implementation of liability caps and contractual limits.
What is the primary research objective?
The primary goal is to determine if international models of limiting auditor liability can be adapted to South Africa to create a more equitable risk-return balance for auditors.
Which research methodology is employed?
The dissertation utilizes a comparative legal research methodology, studying statutes, case law, and academic literature from South Africa and four major international jurisdictions.
What topics are discussed in the main body?
The main sections cover the audit process, the regulatory environment in South Africa and abroad, specific legal theories of civil liability, and a critical analysis of proposed reform models.
What are the defining keywords of the study?
The study is characterized by terms such as auditor liability, regulatory reform, professional negligence, corporate governance, and comparative law.
How does the "deep pocket" syndrome impact auditors?
It creates a situation where the auditor, as a well-insured entity, is disproportionately targeted in litigation even if their fault is minimal, posing an existential risk to audit firms.
Why are South African auditors currently at a competitive disadvantage?
Unlike many international peers, South African auditors currently operate under an unlimited liability regime without established mechanisms to cap their exposure or limit liability through contractual agreements.
What role does the Companies Act 2008 play in this debate?
The act introduced new provisions, such as class action lawsuits, which significantly increase the legal exposure of auditors compared to previous statutory regimes.
- Quote paper
- Steven Firer (Author), 2013, The Limitation of an Auditior's Liability in South Africa, Munich, GRIN Verlag, https://www.grin.com/document/315158
