Pages 6 (1506 words)
In the United Kingdom, companies are required to get their accounts and financial statements audited by external auditors. These state guaranteed market of external audits are applicable to around 600,000 companies, schools, universities, trade unions, hospitals, government departments and charities who have to submit to an external financial audit by accountants belonging to one of the select accountancy trade associations…
Scandals such as those of the Bank of Credit and Commerce International (BCCI), Barlow Clowes, Atlantic Computers, Coloroll, Ferranti, Homes Assured, Levitt, Queens Moat Houses, Resort Hotels, Eagle Trust, London United Investments, Maxwell and Polly Peck have resulted in loss of jobs, savings, investments, pensions and taxation revenues. (Mitchell et al, 1991)
The audit of a company's financial statement poses a certain degree of risk for the auditors and the company. The auditors have to objectively audit a company that reflects a true picture of the company. Since the managers depend on the audit to help them understand the current scenario of the company to take future decisions, and investors use the audit to help them take investing decisions, the correctness of the audit carries high stakes for all. (Defintions)
Until recently, auditors had unlimited liability towards the public incase of negligence, breach of contract or fraud. Due to this very law, there have been cases in the past that have wiped the company clean due to gigantic compensations. Following the collapse of a company, third parties would often attempt to recover their losses from a solvent and insured auditor.
Faced with such claims, the common and civil law courts had to struggle between two ...