"There Is No Point Reforming the Rules on Auditors If the Liability Regime Continues to Be as Lax as It Currently Is." Discuss.
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"There is no point reforming the rules on auditors if the liability regime continues to be as lax as it currently is." Discuss.
Auditors provide a key investigation function in the business world. The law in relation to the liability of auditors changed significantly with the introduction of Companies Act 2006. It is now possible for audit firms to limit their liability towards clients through contractual agreements. The current auditing liability regime has proven to be controversial. This essay will first present the relevant liability rules and examine the underlying problems, then evaluating the significance of these rules with regard to auditing reforming.
Overall, an auditor can be liable either in contractual, tortious or…show more content… After then the decision of Caparo Industries plc v Dickman outlined the three-fold test: 1) There should be a relationship of ‘proximity’ between the parties. 2) The resulting damage is reasonably foreseeable. 3) ‘The situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope.’
This is not an easy test to meet. Firstly, a “special relationship” is required for the third party to claim that the defendant auditor owed him a duty of care. In order to define this concept, Lord Oliver outlined further conditions for the claimant to establish sufficient proximity with the defendant party. Thus the relationship of proximity is hard to specify which placed increasing difficulties on claimants. Secondly, once the claimant has established that the auditor did have a duty of care towards him, he will then need to show that this duty has been breached. It is even less likely that a breach will be found if the auditor has complied with industry practice. Thirdly, the claimant must establish a dominant causal link between the breach and the loss. The likelihood, therefore, of a third party claimant succeeding in their action is actually quite