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Negligence of Auditors
Policy Considerations
In the past one decade, there have been rampant cases against auditors, reflecting both on the litigious nature of a plaintiff's bar, which encourages claims against independent certified public accountants
Owing to this, there have been numerous literatures encouraging the imposition of civil liability on accountants whose actions fail to conform to professional standards. Therefore, many courts after considering the scope of an auditor's vulnerability to negligence have sought to provide some policy considerations in an attempt to protect the auditors.
Some courts have analogized the law of products liability to adopt a predictable standard, which will help them measure an accountant's liability for negligence
. In addition, another important principle, which many courts consider is the cost-benefit limitation because it works differently when compared to the financial audit. Nevertheless, prior to determining a case of negligence, the court can now measure the potential profit of the accounting firm against the possible liability exposure, in an event their reports show material errors.
Negligence Case Laws in Australia
Stone & Rolls Ltd. is a company owned and directed by Mr. Stojevic, whereas, Moore Stephens refer to the firm comprising of chartered accountants hired by Mr. Stojevic to perform audits between the year 1996 and 1998. However, the owner, Mr. Stojevic, stole the company's assets, and...
Owing to this, deceit, siphoning of the company's assets, and falsifying of accounts, the company went into liquidation
The company's creditors, wished to sue the auditors for negligence, claiming that they failed to detect the fraud. The court, in relation to this case decided that in an event, the director and shareholder of a closely managed private company deceived the auditors and fraud occurs on all the creditors (David, 2010), the law protects the auditors from potential sue based on negligence (David, 2010). The argument behind this is that where a company was identifiable with an individual, the fraud of such a company would be attributable to the company.
In above, it was not possible for the creditors to depend on its initiated illegal fraud when putting forward a negligence claim against auditors (David, 2010). Cook and Another v Green and Others Chancery Division District Registry (2008) is another case, which considered the standard of care owed by auditors. Auditors prepared a report suggesting that the decision by directors concerning company's ability to pay up debts within the following 12 months, or within 12 months, was unreasonable. The company later went into liquidation, showing that it could not pay the loan in time.
Owing to this, the company claimed auditor's negligence, stating that they had failed to provide a competent report. In response, the…
References
David, H. (2010). Stone & Rolls Ltd. v Moore Stephens: An Unnecessary Tangle. Modern Law Review, 73 (3), 487 -- 493.
Goldwasser, L.D. (1988). Policy considerations in accountant's liability to third parties for negligence. Journal of accounting, auditing and finance,3(3), 217-231.
Kozlowski, C.J. (1996). Overview of negligence liability principles in recreation. Gmu.edu.
Retrieved 30 December 2013 from http://cehdclass.gmu.edu/jkozlows/p%26r696.htm
Retrieved 30 December 2013 from http://cehdclass.gmu.edu/jkozlows/p%26r696.htm
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