AFM351 Lecture Notes - Lecture 4: Engagement Letter, Internal Control, Contributory Negligence
28 Jun 2018
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Department
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Professor
In the audit environment, failure to meet GAAS is often strong evidence of negligence
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The auditor owed a duty of care to the plaintiff
1.
The auditor breached the duty of care
2.
The plaintiff suffered a loss
3.
The loss resulted in part of wholly from the auditor's breach of duty
4.
In order to prove negligence under tort law, the plaintiffs must satisfy:
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Client suits vary widely, including such claims as failure to complete a non
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audit engagement on
the agreed
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upon date, inappropriate withdrawal from an audit, failure to discover embezzlement,
breach of confidentiality requirements of CPAs
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Can be for breach of contract, tort action for negligence, or both
â—‹
Tort is more common because the amounts recoverable is larger than breach of contract
â—‹
A typical lawsuit brought by a client involves a claim that the auditor didn't discover an employee
theft as a result of negligence in the conduct of the audit
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Liability to clients
A public accounting firm may be liable to third parties including actual and potential shareholders,
vendors, bankers and other creditors
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Since there's no contract, third party people must use tort law
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to argue that the auditor owed a
duty of care
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Can't hold auditor liable to open doors to everyone.
â—‹
Ultramares doctrine
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auditors are not liable for ordinary negligence to parties with whom they do
not have a privity (contractual) relationship.
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Expanded auditor liability beyond privity of contract
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Concept of foreseeable third parties
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the auditors are liable to third parties in situations where the
auditors knew beforehand that the third parties would be relying upon their audit report
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The judge concluded that the auditors did not prepare the audit reports in order to assist
the shareholders in making personal investment decisions so the auditors didn't owe a duty
of care to the shareholders
â—‹
One case the court concluded that the shareholders were foreseeable users; however, it also took
into account indeterminate liability.
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Liability to third parties under common law
Class action suits are becoming easier in Canada
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In cases such as Sino
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Forest, where the company is no longer solvent, auditors often become a
target for class action suits. This is what is referred to as the "deep pocket" theory
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Liability to third parties under securities law
Auditors can face potential criminal liability related to fraudulent F/S and possible civil action if
found guilty
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Can also face criminal and quasi
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criminal liability for breaches of securities legislation, in which the
securities regulator makes the allegations
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Criminal liability
The public accounting firm normally uses one or more five defences in table 3
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3 when clients or
third parties make legal claims of negligence
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Auditors' defences against suits for negligence
AFM 351 Page 3
Document Summary
In the audit environment, failure to meet gaas is often strong evidence of negligence. In order to prove negligence under tort law, the plaintiffs must satisfy: The auditor owed a duty of care to the plaintiff. The loss resulted in part of wholly from the auditor"s breach of duty. Client suits vary widely, including such claims as failure to complete a non-audit engagement on the agreed-upon date, inappropriate withdrawal from an audit, failure to discover embezzlement, breach of confidentiality requirements of cpas. A typical lawsuit brought by a client involves a claim that the auditor didn"t discover an employee theft as a result of negligence in the conduct of the audit. Can be for breach of contract, tort action for negligence, or both. Tort is more common because the amounts recoverable is larger than breach of contract. A public accounting firm may be liable to third parties including actual and potential shareholders, vendors, bankers and other creditors.
