Third Party Liability in Audit
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
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
References: 1. Nguyen, Rajapakse, “An Analysis of the Auditors ' Liability to Third Parties in Australia”. Common Law World Review, Vol. 37(1), pp. 9-44. 2008 2 3. Gomez, “Accountants ' accountability to nonclients”. Saint Mary 's Law Journal vol35. 2003 4 5. Chapman, B. "Limited auditors ' liability: economic analysis and the theory of tort law", Canadian Business Law Journal, Vol. 20, pp. 180-214. 1992 6 7. Pacini, Hillison, Alagiah, Gunz “Commonwealth Convergence Toward a Narrower Scope of Auditor Liability to Third Parties for Negligent Misstatements”, ABACUS, Vol. 38, No. 3, 2002 8 11. Lansley, Gibson, Fogarty, “Corporate governance in Australia” International financial law review. In The IFLR guide to corporate governance(pp. 33–40). 2002 12 13. Chung, Farrar, Puri, Thorne, “Auditor liability to third parties after Sarbanes-Oxley: An international comparison of regulatory and legal reforms”, Journal of International Accounting, Auditing and Taxation 19, pp. 66–78, 2010 14