Addressing the Issue of Audit Liability
Designing Optimal Regulatory Strategies in a Changing Financial Environment Nova Publications May 2016
Posted: 8 Feb 2012 Last revised: 14 Dec 2016
Date Written: February 7, 2012
Abstract
Generally, producers of consumables owe a “duty of care” to third parties. However, it was held in Caparo Industries plc v Dickman and Others that generally, auditors only owe a duty of care” to the company as a legal person and that they do not owe a “duty of care” to any individual shareholder, creditor, pension scheme members or any other stakeholder. The Company Law Reform Bill which became the Companies Act 2006, removed the previously existing limits on auditor liability and compelled an agreement between the company and the auditor. Subject to sections 533 and 534-536, the auditor will not be exempt from liability where he has been negligent, been in a breach or default of duty and other situations which would void his exemption from liability as provided under section 532. The development of the Companies Act 2006 provides a substrate for an interesting research area.
This paper considers how the regulator could implement its supervisory and enforcement tools in addressing the issue of audit liability. For indepth comprehensive information on this paper, see "Role of External Auditor in Regulation (UK, Germany, Italy & the US): Role of the External Auditor in Bank Regulation and Supervision: Comparative Analysis (UK, Germany, Italy, U.S) 3rd Edition".
Keywords: audit, liability, supervision, enforcement, audit concentration, corporate governance, Enron, audit standards
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