"There Is No Point Reforming the Rules on Auditors If the Liability Regime Continues to Be as Lax as It Currently Is." Discuss.

3. Economic loss is caused by reliance on negligent statements. This kind of case was the subject of the key decision in Hedley Byrne v Heller. Hedley Byrne set out specific criteria for recognisisng a duty of care where the C has relied upon a statement maid by the D. there is much debate surrounding the exact criteria set out in Hedley Byrne and concerning its rationale and limits. The relationship between the Hedley Byrne criteria and the three stage test under Caparo v Dickman continues to cause problems.

Niedermeyer, and Presha Niedermeyer. They performed surveys using internal auditors of public companies and external auditors from large and small firms. The survey questioned how auditors made ethical decisions, and they also wanted to see how internal auditors answered versus how external auditors answered. The result of the surveys showed that there was no difference in decision- making between internal and external auditors in the aspect of how major the effects unethical decisions on victims would be. The only difference between auditors in this study was how they make decisions on what is right and what is wrong. It appears that auditors that work for the Big Four have a stronger sense to determine what is right or wrong as opposed to the other auditors working in large and small firms. The study suggests that each firm adopts policies and special training to combat these

During the 1990's, the risk of auditor liability declined, while the benefits of acquiescence increased. Theoretically, the output of the activity will increase. The risk of provide e & public enforcement decreased on the same time

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

In Caparo Industries plc v Dickman7, it was determined that courts had to test the duty by “whether the damage was reasonably foreseeable, whether there was a relationship of proximity between claimant and defendant, and whether it is just and reasonable to impose a duty.”8 If so, then a duty of care could arise.

This case established that an auditor could be sued by a primary beneficiary for damages from negligence. A primary beneficiary is a party that has a direct benefit from the audit. Non-privity parties could also sue for gross negligence. This increased the auditor’s legal exposure to third parties. The SEC of 1934 reflected these changes and many others; one significant change was that auditor’s had a much higher litigation risk due to their new responsibility to third parties.

Recently, the question of liability has become more prevalent in the practice of public accounting. The AICPA (American Institute of CPAs) has been lobbying for liability reform in cases involving negligence or fraud committed by public accountants. So, being an accounting major myself, I wanted to write about the ongoing fight involving liability reform in public accounting.

This research paper analyzes the degree of an auditor's liability to clients and third parties under applicable law.

6. This article was written before the accounting laws were changed because of problems encountered by ex-auditors working at the client, and having connections with the new auditors. This caused many problems exemplified by Enron and WorldCom. That is why it is no longer allowed to take a job with the client. I agree with the law at present, based on the fact that before the law was present, major fraud occurred that could’ve been prevented had hiring their old auditors been illegal and of course many

The act endorses companies to change the practice and regulations of accounting and auditing. It required them to maintain good financial recorded which were different than the past. The management team is held personally liable for the reliability and accuracy of the financial statements. All publically listed companies must establish a system of internal controls which must be evaluated by management at least quarterly and external auditors are required to conduct independent assessments of company’s in –house internal controls as well as report any fault or fraudulent acts they observe.

This means that the main goals of the act in enhancing auditor independence in preventing fraud in future are faced with pressures regarding its efficiency. Case 3 Effective fraud control depends on prevention of the following three weaknesses in the internal control system. First is the static nature of internal controls. This means that internal controls might not be fluid in terms of evolution with the changes experienced in technology, business and the fraud environment. Second is the immunity of the internal control systems. For instance, if a company’s internal control system has weak control policies for its procedures and processes, then the company becomes a target for both internal and external criminal activities. Thirdly, are unclear definitions of the roles and responsibilities of ownership. By this it means that if the internal control system is not well defined to the employees, then there will be an assumption that the role of the internal controls is to only perform audits hence they would not be interested in preventing fraudulent

Looking at the facts given within the case of Easy Finance Limited (EFL) against King& Queen there is a possibility that King& Queen could be liable. An Auditor is expected to exercise the “reasonable care and skill” that is expected of a professional which comes from the legal president established from the judgment by Moffit J in Pacific Acceptance Corporation v Forsyth and Others (1970) 90 (NSW) 29. An auditor can be liable if they are proven to be negligent or have committed fraud (Gay& Smitten, 2010, p.152).

With the avalanche of accounting scandals that have rocked the public, people tend to have increasingly high expectation that auditors are accountable for detecting all frauds, while the standards require auditors to provide reasonable, but not absolute, assurance. The purpose of the report is to discuss the accountability of auditors in detecting fraud by analysing a $16.9 million fraud of Otago District Health Board (ODHB) perpetrated by Swann and Harford from 2000 to 2006. The report will explain the event, the fraud, the stakeholders, the role of auditors and the current situation.

The significance of the case of Caparo Industries Plc v Dickman [1990] lies in the Caparo test which is stated by Lord Bridge:

In general, auditor responsibility is to express opinion on whether the financial statements are free of material misstatements and presented truth and fairness in all material respect. Auditor will first understand of the entity and its environment, and continue with the planning and perform risk assessment procedure, and also all necessary audit procedure to obtain sufficient appropriate evidence before concludes the audit opinion.