Kế toán, kiểm toán - Chapter 4: The legal liability of auditors

THE LEGAL LIABILITY OF AUDITORSCHAPTER 41Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettESTABLISHING THE AUDITOR’S DUTYSociety imposes a duty to exercise reasonable care and skill in two ways:Contractual (including statutory) relationshipSpecial relationship between two parties2Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettREASONABLE CARE AND SKILLAn auditor must exercise the reasonable care and skill expected of a professional.Requires adherence to professional standards in all aspects of an audit.‘The professional man owes a duty to exercise that standard of skill and care appropriate to his professional status’ (Caparo, 1990).3Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettNEGLIGENCEAny conduct that is careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person or persons.4Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettNEGLIGENCE CLAIMSTo be successful in a claim for negligence, plaintiff must prove:Duty was owed to plaintiff by defendantA breach of the duty of care (negligent conduct occurred)Loss or damage was suffered by plaintiffA causal relationship existed between breach of duty by defendant and harm suffered by plaintiff5Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO CLIENTSArises both in contract and in tort of negligence. Early cases:London & General Bank (1895)Kingston Cotton Mill (1896)Thomas Gerrard & Son (1967)6Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO CLIENTS — PACIFIC ACCEPTANCE (1970)Exposition of auditor’s duties and responsibilities:Duty to use reasonable care and skillDuty to check and see for themselvesAudit the whole yearAppropriately supervise and reviewProperly document proceduresReliance may be placed on internal controlsDuty to warn and inform appropriate level of managementDuty to take further action where suspicion is arousedExpectation of discovering material error or fraudProfessional standards provide a guide7Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO CLIENTS — RECENT CASESCambridge Credit (1985)Segenhoe (1990)Galoo (1994)8Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCONTRIBUTORY NEGLIGENCEExists where the plaintiff fails to exercisethe required standard of care, thus contributing to its own loss.Prior to AWA, such a defence by auditors was unsuccessful. Refer:Pacific Acceptance (1970)9Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCONTRIBUTORY NEGLIGENCE — AWA (1995)AWA — losses suffered by company due tointernal control weaknesses over foreignexchange.Auditor liable for failure to report to board of directors.Company contributed to loss by officers failing to report to board of directors and failing to put in place adequate internal control system.10Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO THIRD PARTIESA number of cases have considered the auditor’s liability in relation to persons other than the immediate client.It was believed in early cases that recovery of losses by third parties from auditors for negligence (in the absence of fraud) was not possible.Donoghue v Stevenson (1932) 11Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO THIRD PARTIES — EARLY TEST — SPECIAL RELATIONSHIPA duty is owed to any third party to whomthe auditor shows accounts, or to whom the auditor knows the client is going to show accounts, so as to induce some action.Candler (1951) (per dissenting judgment of Lord Denning)Hedley Byrne (1963)MLC v Evatt (1971)Shaddock & Associates (1979)12Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO THIRD PARTIES — NEXT TEST — REASONABLE FORESIGHTA duty is owed to a specific third party ofwhom auditor was not aware but who waspart of a class of persons of whom theyshould have been aware:Scott Group (1978)JEB Fasteners (1981)Twomax (1983)13Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO THIRD PARTIES — CURRENT TEST — REASONABLE PROXIMITYWas there a sufficient degree of proximity betweenthe auditor and third party? To answer this question,examine whether the statement by the auditor wasmeant to induce the third party to undertake specificactions:Caparo (1990)AGC (1992)Columbia Coffee (1992) (very wide interpretation, later overturned in Esanda)Esanda (1997) (Full High Court of Australia)14Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCURRENT SITUATION — LIABILITY TO THIRD PARTIESA general conclusion is that it would be hard to show that audits on general purpose financial reports were ever intended to induce third parties to undertake a specific course of action. (Auditors would argue strongly that this was never the intention.)15Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettPRIVITY LETTERSThird party requests privity letter from auditor. Privity letter is letter from auditor acknowledging third party’s reliance on audited report.Purpose — to establish a relationship with the required foreseeability and proximity and thereby establish a duty of care by the auditor to the third party.AGS 1014 provides guidance.16Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIABILITY TO THIRD PARTIES — TRADE PRACTICES ACTTrade Practices Act: Consideration needs to be given to the provisions of the Commonwealth Trade Practices Act and State Fair Trading Acts:Acts prohibit misleading and deceptive conduct. Possible that in issuing an inappropriate audit report, auditor might be guilty of conduct that is misleading or deceptive.17Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettCRIMINAL LIABILITY OF AUDITORSAuditors can be subject to criminal prosecution.Offence under s. 1308(2) of Corporations Act for knowingly making or authorising false and misleading statements with penalty of $10,000 and/or two years’ imprisonment.Criminal actions against auditors are rare.18Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettLIMITATION OF LIABILITYAuditors currently jointly and severally liable for damages arising from failure by either themselves or their partners to exercise reasonable skill and care. Liability is unlimited.Spiralling litigation costs and court-awarded damages.Professional indemnity insurance difficult to obtain and prohibitively expensive (claimed to be about 14% of audit revenues).19Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettREASONS FOR LIMITING AUDITORS’ LIABILITYInability of auditors to restrict the scope of their operations and/or resignInequitable position of the auditing profession compared with other professions and service providersInability of auditors to rely on representations of managementAuditors carry heavier burden than other professionals with respect to amount of damages assessed20Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettREASONS FOR NOT LIMITINGAUDITORS’ LIABILITYShould accept full responsibility for their workOnly successfully sued when not performing their duties competentlyIf there is a limit, auditor’s share of liability passed on to publicA precedent for other professions21Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettMETHODS OF LIMITING AUDITORS’ LIABILITYImposition of a statutory cap on auditors’ liability (recommended by JCPAA 2002)Incorporation of auditors (recommended by both JCPAA and CLERP 9, 2002)Replacement of joint and several liability with proportionate liability (recommended by both JCPAA and CLERP 9, 2002)22Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettRESPONSIBILITY FOR THE PREVENTION AND DETECTION OF FRAUDGuidance: AUS 210/ISA 240 for fraud and errorPrevention of fraud is management’s responsibility.Auditor has responsibility to:plan so they have reasonable expectation of detecting irregularities; andpursue further any suspicions.23Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger SimnettRESPONSIBILITY FOR THE REPORTING OF FRAUDAuditor has a duty of care to report fraud, irrespective of materiality, to an appropriate level of management when suspicions are aroused.Auditor may have a mandatory responsibility to report fraud under the Corporations Act or the Crimes Act.Auditor is protected by qualified privilege when reporting matters in good faith.24Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & SimnettSlides prepared by Roger Simnett