Auditor negligence in financial and professional practice

Negligence of Auditors

Policy Considerations

In the past one decade, there have been rampant cases against auditors, reflecting both on the litigious nature of a plaintiff's bar, which encourages claims against independent certified public accountants

Owing to this, there have been numerous literatures encouraging the imposition of civil liability on accountants whose actions fail to conform to professional standards. Therefore, many courts after considering the scope of an auditor's vulnerability to negligence have sought to provide some policy considerations in an attempt to protect the auditors.

Some courts have analogized the law of products liability to adopt a predictable standard, which will help them measure an accountant's liability for negligence

. In addition, another important principle, which many courts consider is the cost-benefit limitation because it works differently when compared to the financial audit. Nevertheless, prior to determining a case of negligence, the court can now measure the potential profit of the accounting firm against the possible liability exposure, in an event their reports show material errors.

Negligence Case Laws in Australia

Stone & Rolls Ltd. is a company owned and directed by Mr. Stojevic, whereas, Moore Stephens refer to the firm comprising of chartered accountants hired by Mr. Stojevic to perform audits between the year 1996 and 1998. However, the owner, Mr. Stojevic, stole the company's assets, and in justification, falsified accounts to show that the company was in a profitable path, but this was not the factual case. Owing to this, deceit, siphoning of the company's assets, and falsifying of accounts, the company went into liquidation

The company's creditors, wished to sue the auditors for negligence, claiming that they failed to detect the fraud. The court, in relation to this case decided that in an event, the director and shareholder of a closely managed private company deceived the auditors and fraud occurs on all the creditors (David, 2010), the law protects the auditors from potential sue based on negligence (David, 2010). The argument behind this is that where a company was identifiable with an individual, the fraud of such a company would be attributable to the company.

In above, it was not possible for the creditors to depend on its initiated illegal fraud when putting forward a negligence claim against auditors (David, 2010). Cook and Another v Green and Others Chancery Division District Registry (2008) is another case, which considered the standard of care owed by auditors. Auditors prepared a report suggesting that the decision by directors concerning company's ability to pay up debts within the following 12 months, or within 12 months, was unreasonable. The company later went into liquidation, showing that it could not pay the loan in time.

Owing to this, the company claimed auditor's negligence, stating that they had failed to provide a competent report. In response, the court evaluated the standard of care of duty owed by the auditors, and suggested that a proper analysis would show the firm's position concerning the payment of the loan. Therefore, the court found that auditors breached the contract because they failed to evaluate the company's affairs to the degree, which a competent auditor would have done.

Principles of Negligence in Donoghue v Stevenson [1932] AC 562

This case is the basis of the modern notion of negligence, by setting out principles that suggest one person owes another person a duty of care. This case is popular, and often referred to as the "snail in the bottle" case. It involves Mrs. Donoghue drinking a bottle of ginger beer, but found a dead snail in the bottle, which made her fall ill; hence, she sued the beer producer, Mr. Stevenson. The main principle set out by the court is that the manufacturer owed her a duty of care, which the manufacturer breached, putting in mind that it was foreseeable that the failure to ensure the safety of the products would cause potential harm to the consumers

In comparison to the current law on negligence, there is a notable difference. The current law in a way attempts to protect against negligence by imposing policy considerations to establish a potential case

. In addition, the current law through policy considerations attempts to determine whether the auditors had some control over the unseen risk or injury. In so doing, the court will be in a position to establish whether auditors had prior knowledge of such injury, and subsequently hold them liable for negligence

Opinion

Apparently, there have been many cases challenging auditors on basis of negligence, a move that shows the vulnerability and potential risk they face. In the case Donoghue v Stevenson [1932] AC 562, although it provides a basis or principles, which many courts utilize to date, my opinion differs. Although the manufacturer is liable for potential harm caused by their products to the consumers, the manufacturer will require protection from the court, an aspect seen in the current law