TATIANA MOLODCHIKOVA S42724155 ACCT 7103
TOPIC 1 (THIRD PARTY LIABILITY)
WORD COUNT 3000
The liability of auditors to third parties has been the subject of much litigation. Litigation claims against accountancy firms have increased dramatically in the last thirty years. Previously, such cases were rare and were viewed with great interest. Nowadays, whereas still treated with great interest they are becoming all kind of common. The specific area of auditors' liability to third parties is an extremely complex area. As there is no contractual claim for recovery of losses, third parties take action in tort. Some time ago it was believed that recovery of losses from auditors for negligence was not possible, because there was no contractual relationship between the parties. But some time later Auditors in Australia were subject to a much higher level of liability to companies and third parties due to the wide scope of statutory obligations. (Nguyen, Rajapakse, 2008) In order to understand the impacts which litigation claims have had on the auditors, we have to examine the cases brought against auditors in the past 100 years. The grounds for these claims have often related to breaches of contract, professional negligence, and the contravention of statutory duties. The "traditional" third party cases all follow a very similar pattern. One entity (A) either invests in or lends money to another entity (B) under a contractual arrangement. Entity B is audited by a firm of auditors under a standard contractual arrangement. A of course has no contractual arrangement with the auditors. Entity A subsequently discovers its new investment is significantly over-valued or its loan is irrecoverable. Having no recourse to B, A then takes a case against the auditors claiming that the only reason it entered into its contract with B was because the audit report appeared to indicate B's state of affairs was fairly stated, whereas subsequent events show it to be significantly misstated. As the plaintiff A has no contract with the defendant auditors, a third party action under the tort of negligence is commenced. (O'Leary, 1998) Though it is still being thought and felt in some quarters that the scope and basis of auditor's liability has not changed since the 1896 case of Re Kingston Cotton Mills Co, there is no doubt however, that the standard of reasonable care and skill bas been exacting since Re Thomas Gerrard and Sons Ltd. Thus, if Re Kingston Cotton Mills Co. were to be decided again today, the case could no doubt be decided differently. It is important to note that in Re Kingstons Cotton Mills case, the auditors had relied on director's certificates, which turned out to be deliberately false. Curiously, the Court of Appeal held that it was not the duty of company auditors to take stock, and they incurred no liability if they rely on directors certificates since a director was a person whom the law adjudged as being competent and reputable. Infact the current Austraian and UK auditing standards and guidelines prescribes a much more exacting standard than the Re Kingston Cottons era. Therefore, it appears the auditors in Re Kingston Cotton Mill would have been required to perform more audit testing to be in a safe position to either rebut or confirm the certificate of dosing stocks prepared by the enterprise’s management. (Asada, Danwanka, 2010). The next important case of Ultramares Corp v. Touche took place in US in 1931. Touché prepared a balance sheet for Fred Stern & Company upon their request. The balance sheet reflected that Stem had a large net worth when in reality the company was insolvent. A lender of the company, the Ultramares Corp,...
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