Auditor’s liability
Legal liabilities of auditors as public accountant results from litigations that are based on contract laws or negligence tort action. Many of the related lawsuits stems from claim in breach –of –contract , in that the auditing services were not carried out as agreed upon. Therefore, when an individual or firm considers that they have been injured by the auditor and results to a lawsuit, they generally ascribe to the probable causes of action that consist of tort , fraud , deceit or the breach of agreement of the contract and the available professional standards (Rittenberg, Johnstone & Gramling, 2011).
The common law mostly places the burden of affirmative proof on the client or plaintiff. The plaintiffs have to proof that they suffered losses or were damaged, a beneficiary relationship existed between them and the defendant, the auditors’ advices were misleading or faulty and that they relied on the provided advice to make investment decisions. Moreover, the plaintiffs have to prove that the auditors’ advice directly resulted to cause if such losses and that there was negligence, gross negligent, deceit which makes the auditors responsible (Rittenberg, Johnstone & Gramling, 2011). The clients may sue the auditor for the breach of contract if there is direct involvement relationship between the parties – Privity. Where such relationship exists, the plaintiff will only be required to prove that the defendant auditor was negligent by not showing reasonable care while performing his professional duties in offering advice to the client. Auditors will be held negligent if the client proof that they were not reasonable careful in offering them the investment advice they needed before making a decision. The auditor owes a duty of care to contractual client because of the privity of this contract (Rittenberg, Johnstone & Gramling, 2011).
The PWC had been accused “extraordinary and egregious” negligence by approving the client’s off-balance-sheet accounting in some transactions related to European Sovereign debt and the decision by the client to ignore recording valuation allowance against the company’s deferred Tax Asset before September 2011. In such a case, the client should be able to show that the auditor intentionally or negligently provided the advice, but should also prove that it did not take part in the accounting decision that led to the losses or damages. The court would have to determine if the client displayed unconscionable conduct that makes the wrong conduct of the auditor against whom the damages are attributed to be at least equal to that of the client. The client should not bear part of the blame if he provided accurate financial statements to the auditor or if such statements were inaccurate, the action was not intentional (Knechel, 2013).
The case relate to auditors offering professional opinion regarding the unascertainable expected results in future. The auditor should not be held liable for the advices if they had agreed with the client that the problem may be complicated and thus, should be allowed for future revisions and liability is only placed on the auditor if the enquiries on the financial condition of the market were not extensive enough to allow for better forecasting. However, there many factors that could lead to losses or damages after the auditors’ advices are utilized (Newman, Patterson, & Smith, 2005). The factors can be external and the may be unforeseeable and this makes the auditor not liable.
References
Knechel, W. R. (2013). Do auditing standards matter?. Current Issues in Auditing, 7(2), A1-A16.
Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2011). Auditing. Mason, Ohio: South-Western.925-927
Newman, D. P., Patterson, E. R., & Smith, J. R. (2005). The role of auditing in investor protection. The Accounting Review, 80(1), 289-313.
