All Liabilities of an Auditor You Must Know

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Learn about the liabilities of an auditor, including legal risks and responsibilities, and how auditors can protect themselves from potential legal issues. Auditors face significant liabilities in their line of work, but by following best practices and maintaining high ethical standards, they can protect themselves from potential legal issues. It is essential for auditors to understand their responsibilities and take proactive steps to mitigate risks.

1.LIABILITY FOR NEGLIGENCE

Negligence means not properly taking care in the performance of duties.

I 1BILITY IN CASE OF LOSS

If auditor is proved negligent and company suffers m loss then he is liable foi the damages.

NO RESTRICI ION ON LIABILITY

Any agreement which relieves the auditor from liability is declared void by the companies ordinance 1984 But court may relieve him from liability of negligence

INDEMNITY CLAUSE INSERT LN ARTICLES

Any indemnity clause inserted in the articles of a company, by which the directors, managing agents, auditors and other officers of the company are relieved Horn liabilities has been declared void by section 194

TIME LIMIT FOR SUIT

Action against the auditor for the negligence can be taken at any time during the life time of company.

2.LIABILITY FOR MISFEASANCE

Misfeasance means wrong performance of a lawful work.

EXPLANATION

The misfeasance means breach of duty or breach of trust involving the company in loss. This liability arises in time of winding up of the company.

The word duty involves here following two steps: –

  • To obtain all information and explanation as required for audit purpose.
  • To give an opinion that balance sheet and profit & loss account show the true and fair view or not.

If the auditor fails to follow these rules then auditor’s this act is called “Misfeasance”.

TIME TO TAKE ACTION

The company can take action against the auditor during its life time.

PROVISION OF LAW

Misfeasance proceedings can be taken against the auditor by

  • Creditors of the company.
  • Contributory of the company.

If case is brought in court against the auditor then he may apply for relief.

  1. CRIMINAL LIABILITY

If the auditor is involved in criminal activities then he is liable to shareholders and other people who rely on him.

During the course of audit if the auditor makes a . false statement in his report, return, certificate or balance sheet with the intention of misleading or deceiving the others, he became criminal liable. An auditor may be guilty of a criminal offence under the following provisions of the companies ordinance 1984.

  1. KNOWN FALSE STATEMENT SEC. 66

If an auditor makes a false statement knowing it to be false, he may be held liable to imprisonment for term which may extend to three years or which may extend to Rs. 20000 or both.

  1. NOT FULFILLING THE REQUIREMENTS OF ANNUAL REPORT SEC. 260(i)

If the auditor’s report does not fulfill the requirements of annual report, the auditor may be held liable to a fine which may extend to Rs 2000

  1. INTENTION TO PROFIT SEC. 260 (ii)

If the auditor’s report is made with the intention to profit or to put a person to a loss, he shall be further liable for imprisonment for a term which may extend to 6 months and with fine which may extend to Rs. 2000.

  1. LIABILITY FOR LIBEL

The auditor may be held liable if he criticized the officers in his report. The auditor’s report should be such that it may not defame or disgrace any person If the reputation or goodwill of any person is injured due to the auditor’s report, he will be held responsible on the grounds of defamation. Auditor is not liable if the criticism is made on facts. In order to hold the auditor liable for libel, his report must contain the following facts: –

  1. MIS-STATE OF FACTS

The report does misstate the facts.

  1. NOT BONAFIED

It is not bonafide.

  1. WRITTEN BY MALICE

It is actuated by malice.

  1. IRRELEVENT SUBJECT

It goes beyond what is the relevant to its subject

LIABILITY TO THIRED PARTY

An auditor can not be held liable to third party because he is not the employee of them. But the third party such as bank and tax department rely upon the audited statement So if the auditor has acted fraudulently and third party relied upon the report and suffered the losses then the auditor should compensate the loss

To hold the auditor liable for fraud, the third party must prove the following facts against the auditor-

  1. UNTRUE STATEMENT _

That the report of statement signed by the auditor was not true in fact.

  1. KNOWN TO AUDITOR

That it was known to the auditor that the statement was not true.

  1. INTENTION TO ACT

That the statement was made with the intention that the other party should act on it.

  1. ACTED AND SUFFERED

That the third party suffered in loss by relying on the statement of auditor.

How can auditors protect themselves from liabilities?

To protect themselves from potential liabilities, auditors can take several proactive steps:

  • Maintain Independence: Auditors must remain independent and objective throughout the audit process. They should avoid any conflicts of interest that may compromise their integrity.
  • Exercise Professional Skepticism: Auditors must approach their work with a critical eye and question any inconsistencies or red flags they encounter. They should not take information at face value but instead verify its accuracy.
  • Document Everything: Auditors should keep detailed records of their work, including their findings, procedures, and communications with the client. This documentation can help defend against any potential legal claims.
  • Stay Informed: Auditors must stay up-to-date on changes in accounting standards, regulations, and industry trends. Continued education and training can help auditors maintain their expertise and credibility.

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