Auditors Liability: Types of Auditors Liabilities [Assignment]

             Definition of Auditors Liability

An auditors liability or responsibility is to provide reasonable assurance that a reporting entity’s financial statements are free of material misstatements, whether due to error or fraud. An auditor (or audit firm) that fails to detect a material misstatement in a client’s financial statements will oftentimes find him or herself in the position of having to defend against accountant’s liability for negligence, 

or worse.

Types of auditors Liabilities

Liability under Statute

Under Companies Act(Civil Liability)Misfeasance means breach of duty imposed by law. A duty has been imposed on the auditor of a limited company according to section 227(3) of the companies act to state in his report.

(i) Whether he has obtained all the information and explanations required by him which were necessary for the purpose of audit;

(ii) Whether in his opinion the balance-sheet and profit-loss account exhibit a true and fair view of the state of affairs of the company and are drawn up according to the companies act etc.

According to section 229, the report has to be signed only by the person who is appointed as auditor or by a partner of the firm if the appointment is in the name if the firm.

The court may relieve an auditor under section 633 under certain circumstances.

Section 543 of the companies act lays down that in the event of the winding up of a company, if it appears that any promoter  director or any officer  of the company has misapplied or retained any money belonging to the company or has been guilty of misfeasance or breach of trust in relation to the company , the court may compel such promoter , director or officer  to repay or restore the property or any part thereof with interest at certain rate or to  contribute  any such sums by way of compensation.

It must be remembered that if a company has suffered any loss, it is only the company which can sue the auditor for damages and an individual shareholder has no right to do so. If the company has gone into liquidation and it is found that on account of the negligence of the auditor, the company had suffered any loss , it is the liquidator who can bring a suit in the name of the company against the auditor.

Criminal Liability of Auditors

·      These types of liability may arise from breaking the rules of law, misrepresentation of company’s balance sheet or any other documents.

·      When an auditor willfully makes a false statement either in a balance sheet or any other document, destroys or mutilates any voucher or document then the criminal liability arises out.

·      The punishment of this liability is jail or fine or both.

·      The company act has given some rules regarding this matter.

1) Section 200:under this section the auditor must help the invigilator employed by govt. for investigating the situation unless the punishment of the events would be 6 months jail or Tk5000  fine or both.

2) Section 219: Section 331: under this section ,if the auditor willingly changes any of the document or statement he will be liable for compensation in this regard(section213 and 215)

3)Section 331: according to this section, at the time of dissolution of the company, on the basis of arbiters report, from the time of formation to dissolution if there is any fraud then the person will be questioned who is liable for that.

4)Section 332: If the auditor changes willingly any book of account or other document or make any kind of alteration to make fraud he will be jailed for 7 years and fined.

5) Section 333: at the time of dissolution by the court or under the supervision of the court, if it is proved that the auditor made any kind of fraud or crime then he will be accused.

6)Section 397:if it is proved that the auditor has given any false information, document, recommendation about ROI, legal document, certificate, balance sheet and other statement, though he knew that it was false, he will be sentenced for 5 years in prison or fine or both

Difference between

Topic	Civil Liability	Criminal Liability
Definition	When a company faces any loss caused by auditor’s negligence of responsibility and breach of faith, then it is called Civil Liability.	When an auditor willfully makes a false statement either in the balance sheet or any other document, it arises an auditor’s Criminal Liability.
Arising of liability	Civil Liability arises by the judgment of Civil Court.	Criminal Liability arises by the judgment of Criminal Court.
Types	It may have two types, (a)Negligence & B) Misfeasance	It may have no types.
Liability	Here auditor is liable to the employer.	Here auditor is liable both to the employer and GOVT. of that country.
Fine	Fine may be required.	Fine or sentence to imprisonment or both may be required.

Liability of auditors for libel(continued)

Liability of joint auditors

In case of large companies, they generally appoint two or more auditors with a view to expedite the audit work so that the audited accounts may be presented to the shareholders soon after the close of financial year. The necessity of joint auditors may arise where the company has ……

1. Several departments.

2. Several branches in different cities.

3. Some subsidiary companies.

When two or more auditors to audit the accounts of a concern & to submit a report on the account, each is jointly &  severally liable unless the contrary is clear from the terms of the appointment.

Liabilities of an Auditor to Third Parties:

There is no privity of contract between the auditor and third parties. But, the auditor is liable for any fraud in tort. Moreover, the auditor has a moral responsibility to third parties. The auditor should realize that the balance sheet, statements etc. Which is signed by him will be read by third parties and if they rely upon such statements and consequently suffer any loss because such statements were misleading he will be responsible to them.

Thus, we can see that the present law has imposed a great responsibility on auditor to third parties as well as to his client.

An auditor will be held liable under the companies Act for the following circumstances:

v Failing to Exercise Reasonable Care:

        An auditor has to exercise reasonable care and skill in the performance of his duties. If he does not do so, he will be liable to third parties as well as to his client.

v  Non-disclosing of Material Facts:

If he does not disclose material facts in the financial statements which he knows are material and that the non-discloser of such facts will make the financial statements are misleading, he will be liable to third parties.

v Following Improper Accounting Procedure:

       If the auditor follows the improper accounting procedure he will be liable to third parties.

v Negligence:

          Auditor will be liable because of negligence on the part of the employees of the auditor.

v Falsification:

If auditor falsifies or is privy to the falsification of any books or papers of the company with a view to deceive any person, he will be liable.

v Omission of Material Statements:

   If he knows that a material statement has not been made in the financial statement and in spite of that he does not report, in this case, he will be liable.

v Destroying Documents: If he destroys, mutilates, secrets etc. any documents, vouchers, books etc. with a view to deceive any person, he will be liable.

To avoid liability to third parties, an auditor should follow the following duties: 

1. An auditor’s duty is to keep strictly confidential all financial matters of the company of which he is the auditor.

2. The auditor must examine all the documents of the company. He cannot plead ignorance of the existence of any documents.

Liability for professional misconduct:

Auditors have to follow some rules and regulation. An auditor can be blamed for the misconduct by the standard charterer’s sub section rules of 1973. These rules are…

LIABILITIES……

•       If the auditor takes auditing responsibility in the organization without communicating his previous auditor.

•       ►If the auditor is recruited in an organization without following the companies’ recruitment rules and regulation.

•       ►If the auditor gives permission an certified accountants as his sub-ordinate.

•       ►If the auditor directly or indirectly manage his clients or professional activities by the advertising, personal latter or meet with the clients.

•       ►If the auditor intentionally avoid his responsibility.

•       If the auditor failed to visualize major fault about the normal certified auditing system.

Liability of an Honorary Auditor                                             

       An honorary auditor liability is:

v Responsible for Negligence:

        An honorary auditor is as much responsible for negligence or misfeasance as a paid auditor.

v Auditor Cannot Relieve:

       An honorary auditor cannot relieve himself of liability on the ground that the agreement between him and his client was not supported by consideration and hence it was void.

v Submit The Report:

         If he wishes to free from liability he should not commence the work. But having done the work and submitted his report, he is as much responsible as paid auditors.

   

 Liability of Auditor for Branch Audit

  

  Liability of auditor for branch audit is followings:

v Responsibility:

          Even though the statutory auditor is not responsible for the work performed by the branch auditor, it is suggested that there should be sufficient liaison between the two auditors to ensure that the work is performed expeditiously.

v Communicate with Branch Auditor:

         The statutory auditor may often have to communicate with the branch auditor, through the branch auditor is under no obligation to prepare the returns, balance sheet, profit and loss account etc.

v Submit to Head Office:

          To submitted to the head office which the auditor may require to enable him to incorporate these returns in the final accounts without any difficulty.

v Express Opinion:

          Branch auditor should express his opinion on the accounts in such a way that the statutory auditor may be able to express his opinion that the accounts show a true and fair view of the state of affairs of the company as a whole.

The auditors appointed in the branch office in foreign countries are local auditors. Auditor in the head office is not liable for the work done by local auditor provided, he makes it clear in his report that he had relied upon the figures supplied by the local auditor and there is nothing to arouse his suspicion. And that the figures of the branches are properly incorporated in the head office books.

Liability for Unaudited Accounts

•       Auditors are sometimes asked by the clients to prepare financial statements from the books of accounts without being asked to undertake the audit of accounts.

•       This report issued by the auditor in such case have some purpose.

         A. Showing the prospective partner about the financial position of the firm. And

         B.  Borrowing money from a lender.

•       The auditor signs such statement runs a great risk in being held liable in case his client suffers a lot.

•       The auditor safeguards the interest of its members.

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