Section 310: Case Study

Section 310 of the Companies Act 1985 made void any provision in a company’s articles or any contractual arrangement purporting to exempt the auditor from, or to indemnify him or her against, any liability for negligence, default, breach of duty or breach of trust. However, from 6 April 2008, provisions introduced by the Companies Act 2006 enable auditors to limit their liability in respect of statutory audit work carried out for a company by entering into specific agreements with their clients. In most third party suits under common law, the auditor will first argue lack of privity. The main auditor defense in most suits is that of nonnegligent performance. Of course, auditors still face the inability of courts and jurors to understand
GAAS and distinguish audit failure from audit risk.

Defenses Against Client Suits
Lack of duty to perform service
Nonnegligent performance (audit in accordance with audit standards)
Contributory negligence
Absence of causal connection (no reliance on F/S)
Defenses Against Third Parties and Under 1934 Securities Act1
Lack of duty to perform service
Nonnegligent performance (audit in accordance with audit standards)1
Absence of causal connection (no reliance on F/S)