The legal nature of auditors’ liability

Abstract

The question of the legal nature of auditor’s liability has become more relevant over the last twenty years, with this issue increasing its importance within the audit profession. The relevance of this matter is a result of a number of important financial failures which have raised questions concerning the function of the statutory audit and the independence of the auditor. The general legal responsibility of auditors results both from European legislation and also from the laws of Malta. In the broader context one must understand that the requirement to have the annual and consolidated accounts of certain companies audited by a qualified professional, is designed to protect the public interest. It is a rare event that an auditor is found criminally liable, however one needs to be alert that this liability can occur. Criminal offences take place when individuals or organisations breach a government imposed law. Auditors may be punished for offences such as fraud and insider trading. On the other hand civil offences can be divided into two aspects; liability in contract and liability in tort. These establish the principles for auditor liability to clients and to third parties respectively. Liability in contract arises when there is a breach of contractual obligations with the auditors’ clients and the parties seek remedy. Since liability in contract arises from the non-performance of an obligation, only the contracting party may bring an action for damages. In liability in tort, auditors can be sued for negligence if they breach a duty of care towards a third party and as a result of this negligence the third party suffers some sort of loss. Here we speak mostly of pecuniary loss. There is little argument that auditors should face the penalties as a consequence of their own failures and there is also no doubt that any parties that have suffered from these failures should be able to seek adequate compensation. One will endeavour to throw light on when an auditor may be liable either criminally or civilly.