Contributory Negligence
I. CASE 4.28: Contributory Negligence
Facts:
• Pride Accountants has been the auditor of Skyhign Ltd for the last five years.
• The audited was made for the year ended 30 June 2009, where Pride Accountants issued an unqualified opinion of the financial reports.
• Skyhigh is a largest client of Pride Accountants.
• They have a good working relationship.
• In the past, audits of Skyhigh have run smoothly and its financial reports have always been unqualified.
• The audited was made for the year ended 30 June 2009, where Pride Accountants issued an unqualified opinion of the financial reports.
• Four months after, the chair of Skyhigh Ltd announced that over the past two years the company have recognized fictitious revenues of $40 million and capitalized development expenditure in excess of $50 million which should have been expensed.
• These irregularities resulted in an overall loss for the financial year of 2009 equal to $60 million.
a. Outline relevant issues in deciding whether your firm, PA, has been negligent in the performance of its duties as the auditor of Skyhigh Ltd.
The position of auditors, with regard to negligent misstatements, was made clear in the Pacific Acceptance case; it was established that any plaintiff, bringing an action negligent misstatement against an auditor had to establish four elements. They were:
• There must be a duty of care owed to the plaintiff by the auditor;
• The behaviour complained about must fail to achieve the required standard of care;
• The auditor's negligence must have caused the plaintiffs loss; and
• The plaintiff’s loss must have been a reasonably foreseeable consequence of the auditor's breach of a duty of care.
In deciding whether the company was guilty of contributory negligence, the major issue to be determined is whether PA failed to meet the standard of care required —in this case, fictitious and irregulars figures in the financial report—which contributed to bringing about its loss.
Facts:
• Pride Accountants has been the auditor of Skyhign Ltd for the last five years.
• The audited was made for the year ended 30 June 2009, where Pride Accountants issued an unqualified opinion of the financial reports.
• Skyhigh is a largest client of Pride Accountants.
• They have a good working relationship.
• In the past, audits of Skyhigh have run smoothly and its financial reports have always been unqualified.
• The audited was made for the year ended 30 June 2009, where Pride Accountants issued an unqualified opinion of the financial reports.
• Four months after, the chair of Skyhigh Ltd announced that over the past two years the company have recognized fictitious revenues of $40 million and capitalized development expenditure in excess of $50 million which should have been expensed.
• These irregularities resulted in an overall loss for the financial year of 2009 equal to $60 million.
a. Outline relevant issues in deciding whether your firm, PA, has been negligent in the performance of its duties as the auditor of Skyhigh Ltd.
The position of auditors, with regard to negligent misstatements, was made clear in the Pacific Acceptance case; it was established that any plaintiff, bringing an action negligent misstatement against an auditor had to establish four elements. They were:
• There must be a duty of care owed to the plaintiff by the auditor;
• The behaviour complained about must fail to achieve the required standard of care;
• The auditor's negligence must have caused the plaintiffs loss; and
• The plaintiff’s loss must have been a reasonably foreseeable consequence of the auditor's breach of a duty of care.
In deciding whether the company was guilty of contributory negligence, the major issue to be determined is whether PA failed to meet the standard of care required —in this case, fictitious and irregulars figures in the financial report—which contributed to bringing about its loss.