The liability of the auditor vis a vis shareholders & third parties

Abstract

The scope of this thesis is to better understand the rights and duties of external auditors when undertaking and performing their obligations at law. This thesis analyzes the relevant provisions of Maltese law with regard to the liability of the auditor, in particular audit relationships that arise. This thesis is divided in chapters to reflect the auditor's possible legal relationships under contract, tort and the auditor's potential criminal liability. According to Maltese law, the provisions which regulate the liability of a professional are the general provisions of contract, quasi contract, torts and quasi torts present under the Civil Code, which derive from Roman and Continental law. On the other hand, the Companies Act and other Acts such as the Banking Act, the Insurance Business Act and the Financial Institutions Act, are all Acts which have been drafted to a large degree on the analogous Acts found under English and Common law. These inferences from different systems of law, have given rise to a number of uncertainties as to the provisions of the law that should apply when a Maltese court is faced with a case of this nature. In this thesis under Chapters II and III the author looks into the yardstick of prudence and diligence required by the auditor in performing his statutory duties and refers to local and foreign judicial interpretations on this matter. These Chapters also examine the extent of his duties and responsibilities and illustrate particular situations where the auditor's standard of conduct could vary. With regard to the potential criminal liability of the auditor, this thesis indicates the possible dangers faced by auditors in terms of the Criminal Code and in terms of other Acts such as The Professional Secrecy Act and The Money Laundering Act. Chapter IV makes reference also to The Accountancy Profession Act and the situations which the legislator has contemplated as criminal, under this Act. It is surprising to note the numerous potential criminal situations in which an auditor may be held liable.

On a final note, the author makes particular emphasis on the fact that an auditor must be independent in the conduct of his work. Although the company's audit is of benefit to a variety of financial report users, it is legally intended for its owners, the shareholders. This can be best illustrated by referring to the main provisions of company legislation concerned with the appointment, qualifications, removal, resignation and remuneration of the company auditor. Nevertheless, in today's world the shareholders are not the only report user group interested in the company's audit. Auditors are well aware that there are 'foreseen' user groups which are likewise interested in those audited accounts of the company. This makes it all the more imperative on the auditor to adhere to the law and to maintain absolute independence from the directors or other interested third parties when drawing up the statutory audit report.