Types of Auditors Liability

Procurement and Audit notes revision

Auditors are potentially liable for both criminal and civil offences. Criminal liability arises when one breaks the statute laws governing the relationship between persons and the state. Civil liability on the other hand arises when on breaks a laws governing relationships between individuals and/ or organisations. The Law of Torts, The Law of Contract, Company’s Act, 2015, Public Procurement and Asset Disposal Act, 2015; Public Audit Act, 2015; The Public Finance Management Act, 2013 etc.

a) Liability to the client company under the law of contract
The audit client company represents all shareholders acting as a body (a company cannot be represented by a single shareholder). The auditor has a duty to report to the shareholders whether the procurement records show true and fair view. The auditor therefore has a contract with the procuring entity and not with the individual shareholders.
Under this contractual relationship, it is implied that the procurement auditor will carry out his work with reasonable degree of care and skill. The degree of care and skill required depends on the nature of work undertaken. If the auditor has complied with the GAAPs and guidance from the ISAs, it would be difficult to prove that the auditor was negligent.
The auditor has no duty to an individual shareholder. A shareholder who makes investment decision by relying on the auditor report and suffers financial loss cannot claim damages under the law of contact. Only if the company i.e. the entire body of shareholder has suffered a loss can such case brought under the law of contract.
b) Civil liability
An auditor could be sued in a civil court if he breaches his position of trust and confidentiality e.g. if he uses information acquired in course of an engagement for his financial gain or benefit of another party. Civil liability will result in the auditor being required to make good the financial loss suffered by the plaintiff.
c) Criminal liability
An auditor shall be criminally liable if he wilfully makes a false statement in any report, certificate or in the procurement records, i.e. with an intention to deceive or mislead. For instance, where the auditor publishes or concurs in the publishing a written statement that to his knowledge is or may be misleading, false or deceptive accepts appointment when he is ineligible to do

so, or continues in office becoming ineligible, misappropriates a client’s
property, obtains advantage by deception and falsifies procurement records.
d) Liability to third parties under tort or negligence
In this case third parties refer to anyone than Client Company who has used the auditor’s report and wishes to make a claim for negligence. It therefore includes any individual shareholders in the company, any potential investors and other providers of capital such as lenders and creditors. The difference between parties and the client company is that such third parties have no contract with the auditor and therefore no implied duty of care. For third parties to succeed in claiming for damages under negligence they must prove that;
• A duty of care existed i.e. the auditor owed the third parties a duty of care
• The duty of care was breached because of the auditor’s negligence
• They suffered a financial loss as a direct consequence of an auditor’s

Circumstance under which a procurement auditor may be liable for damages for materials misstatements in published procurement information on which he has expressed an audit opinion
Liability for damages for material misstatements in published procurement information may arise from any of the following situations:
• His failure to detect material error or fraud that he would have been reasonably expected to detect.
• Carelessness and/or dishonesty on the part of the auditor
• Falsification of procurement records or documents
• Publishing a misleading statement intended to deceive members or creditors.
• In any proceedings for negligence, breach of duty or breach of trust, the court may relieve the auditor from his liability if: –
• He acted reasonably and honestly
• Having regard to all circumstances of the case he ought fairly to be excused for the negligence or default.
• If he carried out his work in accordance with generally accepted auditing standards
Categories of parties who may institute successful legal claims against a procurement auditor emphasizing the basis a court of law would use to assess the value of damages
The company’s Act 2015, recognizes the auditors’ responsibilities to:

i) His client whom he owes a primary duty of care.
ii) To third parties under tort of negligence.
iii) Government under criminal law.
Under the law of contract, only persons in a contractual relationship with the auditor can sue i.e. the client company. Individual Shareholders do not have a contract with the auditor hence they cannot sue in contract.
In the tort of negligence, the plaintiff i.e. the third party must prove that:
a) The defendant (i.e. auditor) owes a duty of care.
b) The defendant has breached the appropriate standard of care i.e. has been negligent
c) The plaintiff has suffered a financial loss as a direct result of the
defendant’s breach.

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