1.7 Recent development of Audit liability
The most common on the corporate governance debate are
the duties of care which
are in relation to conduct and supervision of the
company's affairs, and in particular
the preparation of the company's accounts. The auditors can
be held liable in relation
to their audit of the company 's accounts,
if they conduct their business
negligently. On the other hand, there is now a
fair amount of case law which
recognises that common sense and logic an important role
to play when it comes to
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determining the cause of a plaintiff's loss.
In South Australia Asset Management Corporation
v York Montague Ltd, a
valuer had provided a lender with a negligent over-valuation
of a property offered as
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security for a mortgage advance. The lender gave evidence
that the loan would never
have been entered into in the first place if the lender had
been aware of the true value
of the property. The House of Lords had to determine the
lender's loss, which had
been increased by a drop in property values throughout
the market. It was held that
the valuer was not liable for the loss due to the drop in the
market.
The House of Lords stated that generally a wrong-doer
would only be liable for the
foreseeable consequences of the action being taken in
reliance on that information.
The decision makes it clear that a negligent
valuer will only be liable for the
consequences of a lender's bad investment which are
within the scope of the duty
which the valuer owes to the lender.
The damages awarded against the auditors can be far in
excess of their ability to pay,
either from their own resources through their professional
cover; the liability system
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is regarded as a risk transfer mechanism and the auditors
are the prime transferees.
114.M.Robertson and K . Burkhart , ' Liability of Auditors to
third Parties'.
115.[1996] All ER 365.
116. G.W. Cosserat ,' Modern Auditing '.
On the other hand, the Supreme Court of Canada, in
Hercules Management Ltd
stated that accountants can be held responsible in
delict or tort to non- clients
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for the negligent acts they commit in exercising their
protection. In an attempt
to determine class or classes of plaintiffs to whom
auditors owe duty of care, a
duty of care the Court held that auditors are liable to
plaintiffs who are members of a
limited class whose use of and reliance on financial
statements are known to them.
Here the Court recognised that in many cases a duty of
care exists when it is proved
that the accountant ought to have reasonably foreseen that
shareholders, as a class,
will rely on his representations and that the reliance by
shareholders was reasonable
(such as in the Caparo Industries plc case).
According to the Court, the normal
purpose for which auditors' reports are used, in order
to give rise to a duty of care
on their part, is to guide the shareholders as a group
in supervising or overseeing
management and not to assist them in making personal
investment decision, the
auditors should not, as a matter or policy, be
exposed to indeterminate liability.
More recently, in Price Waterhouse v Kwan
the Court of Appeal held that the
auditors owe a duty of care in tort to the Solicitors 's
clients who invested through the
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Solicitors `nominee company. Here, the Court found that there
was a clear prima facie
case for imposing the duty of care which should be
confirmed at trial unless there
emerged some evidence providing policy reasons
sufficient to lead to the opposite
conclusion.
117. (1997) D.L.R. (4th ) 577 (S.C.C.).
118 . (2000) 6 NZBLC 102,945
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