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Auditors' liability - Essay Example

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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 conflicting interests: the public's interest in the independent and competent review of financial statements and the interest of the auditing profession in carrying out its function without the burden of a potentially overwhelming liability. (Khoury, 2001)
The scandal of Enron and its audit company, Arthur Anderson, were the victims of improper auditing and impedance to justice. There were once the 'Big 8' auditing companies which now have been left with the 'Big 4' after a series of mergers. All over the world, these four companies control about 85% of the total audits. (Lawrence, 2006)
Auditor liability has been an increasing concern for the auditing profession for a considerable number of years. Such large liabilities are unfair and unjust to auditors. Consequently, a number of jurisdictions in recent years have introduced measures aimed at reforming their auditor liability regimes. However with the communities becoming increasingly litigious, one wonders when the 'Big 4' would be left with the 'Big 3'. (Lawrence, 2006)

Duty of Care Owed
A duty of care is an obligation to provide a certain level of care to others depending on different circumstances to avoid injury to that individual or his property. Basically the relationship of the parties, the negligent act or omission is prevented by fore-sighting any loss to that individual. An auditor is expected to be able to foresee such acts and respond accordingly. In cases of unintentional negligence which results in losses, such an act will be regarded as having breached a duty of care and at this a time a duty of care is owed. (Solicitors, 2002) (Definitions)

The English Law for duty of care was formed in the Scottish case of Donoghue v Stevenson 1932 SC (HL) 31. The general principles for duty of care to be owed included the presence of three points (Solicitors, 2002)
1. Does a duty of care exist
The existence of duty of care depends on the type of relationship between the parties. An auditor of a company has a duty towards the ...Show more


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…
Author : mazieleuschke
Auditors liability
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