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AC312

AC312. Lecture 9: Auditor Liability. CRIMINAL CHARGES. The Theft Act 1968 s. 17: destroying or falsifying documents required for accounting purposes (called “false accounting”) The Financial Services Act 1986: misleading statements or forecasts attempting to induce someone to invest

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AC312

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  1. AC312 Lecture 9: Auditor Liability

  2. CRIMINAL CHARGES • The Theft Act 1968 s. 17: destroying or falsifying documents required for accounting purposes (called “false accounting”) • The Financial Services Act 1986: misleading statements or forecasts attempting to induce someone to invest • The Companies Act 1985 companies should not engage in fraudulent activities - auditors must not knowingly be associated with such fraud

  3. NEGLIGENCE • A successful negligence action requires four essential conditions: • Duty of care (by the plaintiff to the defendant) • Breach (of the duty of care) • Causation (the breach caused and the possibility of the breach/damage was foreseeable) • Damage (the plaintiff incurred damages as a consequence of the breach)

  4. CONTRACTUAL RELATIONSHIPS

  5. LIABILITY TO 3rd PARTIES • This type of liability for physical injury is long established (eg Donoghue v Stevenson, 1932).

  6. KEY UK CASES • 1951: Candler v Crane Christmas & Co1963: Hedley Byrne & Co V Heller and Partners Ltd1981: JEB Fasteners Ltd. v Marks Bloom & Co1982: Twomax Ltd and Goode v Dickson, McFarlane and Robinson • 1996: ADT Ltd v Binder Hamlyn

  7. Caparo Industries plc v Touche Ross (1987) • The plaintiffs argued that the financial statements - audited by the defendants -that they had relied on had over-stated the profits of Fidelity plc because of inclusion of non-existent stock etc. • Plaintiffs failed in the High Court, won an appeal in the Court of Appeal, but lost in the House of Lords

  8. What is the Optimal Level of Auditor Liability • Considerations: • Duty and Responsibility • Shareholder/Lender rights • Incentive • Justice/Fairness • Recompense • Punishment • Risk and Return

  9. PROFESSION’S ARGUMENTS • No longer possible to obtain full professional indemnity insurance • Cost of partial professional indemnity insurance rising • Recognition that auditors want to void averse publicity has encouraged plaintiffs to bring actions • Computerization and globalisation has increased possibility of fraud • Unfair concept of joint and several liability

  10. PROFESSIONS’ OR FIRMS’ PROPOSALS • Proportionate liability • Capping liability • Incorporation • Limited liability partnerships

  11. PROPORTIONATE LIABILITY • Auditors should be responsible for only a proportion of the liability, the proportion payable being calculated on the assumption that the other possible defendants had sufficient funds to meet any obligation that might fall upon them

  12. CAPPING LIABILITY • Auditors should be able to limit the amount they would have to pay in damages for an individual audit, should they be sued. • A formula could be: audit fee multiplied by X • Companies Act 1985 forbids this for audit work, but allowable for non-audit work • Unfair to plaintiffs? Does not overcome joint and several liability complaint

  13. INCORPORATION • Possible since 1989 (Companies Act) • KPMG the only big firm to have incorporated • Against: increased tax liability; disclosure requirements

  14. LIMITED LIABILITY PARTNERSHIP • The resources available to meet successful negligence claims would be limited to the assets of the partnership - the partners personal assets would be excluded • Not permitted (until recently) in the UK, but permitted in Jersey • Extensive lobbying of UK government to permit; • Campaign against/exposure by Prof. Sikka and Austin Mitchell MP

  15. CLASS TASKS

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