EFG Company Limited purchased shares in PQR Company Limited on the basis of PQR Company Limited‟s audited accounts. Unfortunately, EFG Company Limited has incurred losses as a result of the purchase. EFG Company Limited considers that the auditor was negligent in carrying out his audit. EFG Company Limited wishes to sue the auditor for the loss it has incurred.

• This problem is based on the question whether an auditor owes legal duty of care to a third party. As a general rule, an auditor does not owe 3rd parties any legal duty of care when making his report. However, a 3rd party who suffers loss or damage by relying on an auditors report may recover from the auditor if it is established that:

i) There was a special relationship between the auditor and the 3rd party and therefore the auditor owed that party a legal duty of care. (Hedley Byrne and Co. Ltd V. Heller and Partners Ltd.
ii) The loss suffered was of a financial nature.
• It must be evident that the auditor knew or reasonably ought to have known that the 3rd party would rely on the report. In this case it is not evident that there was any special relationship between the auditor and EFG Company Ltd. The company is unlikely to succeed against the auditor.

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