The expectation is that an auditor should be held responsible for the quality of his/her work. This is because a major error or omission by the auditor can result in a false opinion. Auditors have a moral, professional and legal responsibility. In the Companies Act 2006, Section 507 prevents auditors knowingly or recklessly causing an audit report to include any matter that is “misleading, false or deceptive in a material way”. To be proved in cases of civil liability Mr Justice Woolf in the case Lloyd Cheyham v Littlejohn (1985) established the 4 issues of duty of care, negligence, causation and quantum.
The duty of care issue asks whether the defendants owe the plaintiffs a duty of care. The law is built on a series of important cases. The high profile case Caparo Industries plc v Dickman & Others (House of Lords 1990) originated when Caparo, an existing shareholder, made a successful take-over bid for Fidelity. Caparo alleged that the bid was made in reliance of misleading accounts and that if the true facts had been known, it would not have bid. It alleged fraud against the directors (Dickman) and negligence against the auditors (Touche Ross). However, the House of Lords were unanimous that auditors do not have a duty of care to individual shareholders or future investors. Although, Caparo went on to successfully pursue their action for damages against the directors of Fidelity. Lord Bridge of Harwich said that the auditor owed a duty of care if he/she was fully aware of the nature of the transaction and knew it was likely the plaintiff would rely on it in deciding whether to engage in the transaction. Thus, auditors owe a duty of care to the company’s shareholders as a group and not individual shareholders in order provide accurate financial information especially when investors are reliant on it to make decisions, but then privity would need to be established.
Next is the negligence issue which asks were the defendants...
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