Auditing Negligence in Australia - Essay Example

Auditing Negligence in Australia AUDITING NEGLIGENCE IN AUSTRALIA Question Auditors in Australia and around the world face challenges and criticism because of corporate collapses, as they are associated to professional negligence allegations and breach of the statutory duties1. These allegations demonstrate the role of the current court system in protecting the auditors, creditors, and shareholders. However, the court has been on the forefront in protecting the rights of the auditor based on a number of policy considerations. The ultimate goals of the policy reforms have been to reduce the level and extent of third party liability towards auditors, and prevent the possible scenario where auditors cease to provide their auditing services. The two policy reforms considered in Australia include the proportionate liability and statutory capping schemes2. The various professional bodies governing auditing in Australia determine application of statutory capping. Nonetheless, statutory capping has various negative policy implications. One, it is a disadvantage to third parties who may be innocent victims of the auditors negligence. Two, it may induce the auditors to charge lower fees as they would expect to pay damages in case of a legal suit. Third, it allows for government interference in the auditing profession, which would hinder the independence of auditors. Question # 2 Australian security and investment commission vs. Rich (2009) One. Tel Communication company reported losses of $290 million as a result, its share price collapsed and the directors were sued for negligence. ASIC sued Jodee Rich and Mark Silberman for failing to meet their duty of care causing the collapse of the company in May 2009. ASIC claimed that by failing to communicate true financial performance and financial position of the company, these directors did not exercise due care and diligence, which resulted to the cancellation of the proposed rights issue in 20013. The directors were found not guilty of negligence on accounts that the summary presented by ASIC about Mr. Rich’s evidence was considered as false. The judge also implemented the business judgment rule under the Corporations Act 2001, Section 180(2). Directors whose conduct breached section 180(1) were provided defense in the business judgment rule4. HIH Insurance vs. Rodney Adler HIH Insurance was among the biggest insurance companies in Australia. However, in March 2001, the company lost a value of about $5.3 billion and, in turn, became insolvent. Some management member was sued for fraud after the Prime minister, John Howard, created the Royal Commission to investigate the collapse of the company. Rodney, the main defendant, had three unsecured loan transactions with no proper documentation to support the flow of the funds in his care 5. Rodney Adler was found guilty on the following accounts and was sentenced to four and half years in jail. He had; Purposely became dishonest in dealing with the affairs of company, Failed to fulfill his responsibilities truthfully as the director of the company and also failed to protect the interests of the company, Used misleading and false statements to obtain money for himself. It was held that Rodney failed to protect the interests of the company and that he refused to follow the right channel in relation to investment. His main objective was to safeguard the company’s share price on the simple basis that he was also a shareholder6. Question # 3 Duty of care The duty of care, in essence, necessitates the plaintiff to establish a legal relationship to the defendant in the form of a duty or an obligation. In the Donoghue v Stevenson case, the ruling of the court was that a legal duty to care existed between the two parties, even though, there was no direct correlation between the Defendant and the Plaintiff7. In this judgment, the court considered proximity relationship between Defendant and the Plaintiff and the reasonable foreseeability of harm altogether. This was unlike in current negligence auditing where they are viewed, as separate, and each are important in making a ruling regarding negligence. Standard of care The standard of care in the Donoghue v Stevenson case was the reasonable man. Based on this principle the conduct of the defendant was assessed with regards to the various standards of a reasonable man8. Conversely, the court is not capable of determining the various standards of a reasonable man. The standard of care in the current auditing laws is the employment of reasonable skill and care in handling a company’s financial reports. In order for the claim of negligence to stand under the current law, the plaintiff has to prove that the auditor failed to meet the standard of duty to care by acting carelessly. Question # 4 I do not agree with the current laws and regulations regarding auditor’s negligence in Australia. I believe that the current range of laws including contractual law, common law and statutory law, all contribute a significant role in determining the liability of the auditors in light of their increasing responsibilities and obligations9. The current laws and policy framework are also very important in setting the various standards and guidelines for governing; the actions and obligations of auditors and certified accountants in performing their statutory duties. The many number of laws and statutory regulations require auditors to extend a greater level of liability to third parties. This ultimately has the effect of demeaning the accounting and auditing profession. There is a need for the court and the judicial system to institute a number of policy framework and reforms, which would help in limiting the third party liabilities imposed on auditors10. Appropriate reforms would go a long way in protecting both accountants and auditors in performing their statutory and legal duties. It would also prevent unscrupulous and fraudulent third parties from instituting legal proceedings against the auditors. In addition to this, appropriate policy reforms would also protect the interest third parties who actually, suffer from financial loss, which has occurred as a result of negligence and enable them to seek appropriate compensation. References Dobson, AP. Reddy, KJ. & Jo, R., 2003. Commercial Law. UK: Psychology press. Hocking, BA. & Smith, A. 2003. Liability for negligent words. London: Federation press. Nguyen, V. & Pelma, R. 2008. An Analysis of the Auditors Liability to Third Parties in Australia. Common Law World Review. 37: p. 9-44 Plessis, JJ. Du, PJJ. Marko, B. & Anil, H., 2011. Principles of Contemporary Corporate Governance. London: Cambridge University. Sherer, M. & Turley, S. 2006. Current Issues in Auditing. London: Sage Tomasic, R., Bottomley, S. & Queen, R. 2002. Corporation Laws in Australia. London: Federation press. Read More