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Auditor Liability in Canada

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Auditor Liability in Canada
1. Auditor Liability in Canada A & B

Is it reasonable for a potential investor or existing shareholder to rely on audited financial statements that a corporation makes available for public consumption?

Should an investor be able to sue a corporation's auditor if audited financial statements materially misrepresent the financial status of the company audited?
a. Should a potential investor only be able to sue the corporation?
b. Should there be any limit on the auditor's liability?

Negligent misrepresentation – must be proved and must meet all 5 elements - hard to do

Indeterminate liability – defendant has caused the plaintiff harm. Ie primary purpose for the audit related to shareholder? - costs could be unlimited so its hard to make a policy out of it - these seem to prevail

Hercules vs NGA

- Hercules invested in NGA. NGA negligently prepared its financial statements and Hercules suffered losses. - Went to court and did not succeed because the auditor’s reports were not prepared for the purpose of guiding investment decisions, so they were not using them for the purpose for which they were prepared. - Canada ranks high (2nd to UK) in terms of shareholders having difficulties in suing auditors.

Kripps Case (Success story)

- capitalized “upaid interest” as revenue and also increased assets - 4.9 mil in default for more than 90 days > not included in financial statements > put on statements as “non-performing loan” for 950,000 and provision for losses of $125K. - Kripps invested one mil and then “non-performing” loans unable to meet obligations > lost 70% - Touche Ross (auditor) > satisfy regulatory requirements on prospectus - Auditor knew that its report would be used as part of the prospectus (part of a selling document), concerns of indeterminate liability did not arise and remaining elements of negligent misrepresentation were present. Bill 198 in 2003 > avenue for shareholders on the
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