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Unit 11: Appointment, Right, Duties and Liabilities of an Auditor

11.7 Auditors’ Liabilities Notes

The liability of Auditors is unique from that of other white collar professionals in so much as
they are liable not only to the who has appointed them. Another noteworthy fact is that there
have been far lesser cases against accountants than any other professionals. The liabilities of
auditors of a company can be studied under following heads:

11.7.1 Civil Liabilities

Civil liabilities mean the disputes over losses caused to one party by acts of another. The civil
liabilities of an auditor can be for:

Liability for Negligence (under Law of Agency)

Auditor being agent of the Shareholders is required to carry out his duties with reasonable care
and skill. If he fails to do so, he is liable to make good any loss caused to the third party. The first
and foremost issue which arises as far as the liability of the auditors are concerned is with regard
to the nature of their liability. They may arise from either: (1) Negligent Acts, that is, where the
acts of the auditors lead to the damage being suffered by the plaintiffs, or (2) Negligent Statements,
that is, the incorrectness of a statement given to the client causing loss or damage to the clients
interests. There have been cases which have followed different principles at different points of
time as per the circumstances of the case. The case of Hedley Byrne v. Heller is a case where the
liability had arisen from negligent misrepresentation. The essence of the liability arises from
the fact that the parties have a special/contractual relationship and the negligent behaviour
results in the breach of the contract. There has been a great discussion on this aspect for a number
of years and the legal position seems to have settled that if the misrepresentation was of a very
general nature and had not been specific in nature as pursuant to a contract then the tort action
would be a better option for the client. Thus, now the narrow scope, which would have been the
result of negligence based on contractual relationship has been expanded a great deal. Negligence
is a tort in which a breach of duty of care results in damage to person to whom such duty is owed.
We now seek to examine the scope and extent of such tortuous liability of the auditor.

Major Legal Decision

Arthur E. Green & Company vs. Central Advance & Discount Corporation Ltd. (1920): It was
held that auditor is guilty of negligence. Auditor accepted the schedule of bad debts furnished
by the client, though it was apparent that debts were not recoverable.

The London Oil Storage Co. Ltd. vs. Sear Hasluck & Co.: In this case, auditors were held liable
for negligence. Auditors failed to verify the physical existence of cash in hand. Cash balance as
per books did not agree with the physical balance, the difference was misappropriated by the
cashier.
Irish Woolen Co. Ltd. vs. Tyson and Others: In this case auditors were held liable for negligence.
Profits were overstated by not recording purchase invoices. He was held liable for having failed
to exercise reasonable care and skill.
Kingston Cotton Mills Co. Ltd.: In this case auditors were not held liable for negligence. It was
held that it is not the duty of auditors to take stock, if they accept certificate in the absence of any
suspicion, he has carried out reasonable care and skill.
In Mckesson V Robbins (American case): It was held that it was duty of auditors to test check the
physical stock. Auditors should inspect securities, test check stock wherever it is practicable and

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