He must take reasonable care to ascertain. When the overstatement was discovered, the banker (third party creditor) sued the auditors for both negligence and fraud. Liabilities of a Company Auditor A Company Auditor is appointed under the Companies Act. V.18. The auditor may be held liable for breach of trust or responsibility and for wilful misconduct and default, depending on the circumstances of each case. This is because the auditor’s liability to clients occurs only when there is breach of contract, i.e. (2) There was no system of internal check. In the absence of any written agreement or contract, he is expected to perform a complete audit. Article 31 of the 17 May 2006 Statutory Audit Directive requires that the European Commission studies ‘the impact of current national liability rules of the carrying out of statutory audits on European capital markets and on the insurance conditions for statutory auditors and audit firms, including an objective analysis of the limitations of financial liability. Mr. Justice Denning gave a verdict that the auditors were not liable to the third parties in absence of any contractual relationship between them. 4. states that whosoever issues or signs any certificate required by law to be given or signed or relating to any fact which such certificate is by law admissible in evidence, knowing or believing that such certificate is false in any material point, shall be punishable in the same manner as if he gives a false evidence’. a) Liability under Companies Act 2013 b) Liability under the Indian Penal Code c) Both a&b d) None of the above 134. An auditor is liable to pay damages for loss to his client in the event of non-fulfillment of the contract. “Thus, it appears that the auditor, in the absence of fraud,-does not incur liability to third parties who suffered damages for the former’s negligence. Audit of joint stock companies comes into this category. He has to examine facts and see that the members have his opinion as to the balance sheet showing the state of affairs of the company. ): He shall be punishable with imprisonment shall also be liable to a fine if, with the intent to defraud or deceive any person, the auditor: (1) Destroys, mutilates, alters, falsifies, or secrets or is privy to the destruction, mutilation, alteration, falsification or secreting of any books, papers or securities; and. He has nothing to do with the prudence or imprudence of making loans with or without security. Summary: An auditor was guilty of misfeasance as he gave only the ‘means of information’ and not the ‘information’ to the shareholders in respect of the untrue and incorrect state of affairs of the company. According to Mr. Justice Romer (in Chancery Division): It was held in respect of the first charge that: (i) It was no part of the auditor’s duty to bring to the notice of the directors and shareholders about the mis-description of the debts; (ii) Such mis-description did not involve any damage to the company; (iii) The auditor need not specifically draw the attention of the shareholders of loans given to the brokers or others; and. (1) An auditor is liable where assets are mis-described in the balance sheet if the Company incurs damage as a result of such mis-description. As in case of optional audits company auditor is liable for his negligence. art. 10. He is also liable for breach of fiduciary relationship by disclosing confidential matters. Statutory Auditor. However, in the context of Indian legislation, the auditor can be held liable for damages if he has authorised the issue of such a prospectus which contains misleading information. The trend of auditor liability to clients will not be discussed in this report as it does not change much. Duty of care and diligence is important for an auditor though there is no remuneration for him. The audit firms must make sure that in case of any negligence or bad faith. (3) If the auditor has called for the creditors’ statement of accounts upon which the payment was ordered and compared them with the ledger, he would have detected the suppression and carrying over to invoices. In case where company wants to proceed legally against its auditor on the ground of negligence, the following conditions are to be fulfilled; Company must be capable of proving that auditor is negligent. (2) The directors were bound to make good the losses arising out of the payment of dividend out of Capital and to the like amount the auditor and manager were for damages caused to the business. Where there is nothing to excite suspicion, very little inquiry will be reasonable and sufficient. (2) The auditor’s committed a breach of duty by not verifying the petty cash in hand and hence were liable to pay damages of a nominal amount. Authentication of Assets and Liabilities: Verification of assets and liabilities for checking their existence, valuation, completeness and disclosure in financial statements. Common law liability arises from negligence, breach of contract, and fraud. (iv) There was nothing to arise in the auditor’s mind any doubt as to the goodness of the debt. 628 of Companies Act): If in any return, report, certificate or other document, he makes a statement: (1) Which is false in any material fact knowing it to be a material and. Hedly Byrne & Co. Ltd. As a result, the accounts had shown unrealized profits. Contractual liability is agreed liability. He may be held responsible under the Contract Act ‘in failing to perform the duties’ as laid down in agreement. Before uploading and sharing your knowledge on this site, please read the following pages: 1. 5. The auditors confined their scrutiny to the evidence created and/ or held by the client, such as sales invoices and did not ask for direct confirmation of accounts balance from the customers. Plagiarism Prevention 5. He is responsible on account of negligence in performance of his duties. In India, the term "statutory auditor" refers to an external auditor whose appointment is mandated by law. Company auditors liabilities are determined by companies act itself. He was trusted to discharge his duty.”, (2) “An auditor is not merely an arithmetical machine to check the figures in the books. But he never asked a question and certified the accounts. when the auditor fails to meet the requirements that were established in the contract or normally in the engagement lette… Who are eligible to appoint as statutory Auditor? It is supposed to be a pictorial representation of the trading position of the Company, easily appreciated not by ignorant people but by persons who are reasonably able to understand commercial conditions.”, (2) “A loan and a deposit; being obviously items differing completely in principle from the balance sheet point of view, ought to appear on different sides, one as an asset and the other as a liability and that the act of consolidating the two and presenting them as one item in the balance sheet was a striking case of non­disclosure amounting to suppression of truth.”. Copyright 9. Wilde and others Vs. Cape and Dalgleish (1897): The brief fact of the case was that the cashier of the plaintiffs defalcated certain amount which the auditor failed to detect as he had not checked the pass book. (7) The Govt. (255(6)). Companies Act 2016 Duties, functions, liabilities and responsibilities of auditors are further defined by MIA Statutory Requirement for Appointment of Auditors Every company must appoint an auditor at its AGM, to hold office from the conclusion of that meeting until the conclusion of the next AGM. (3) An auditor is liable for misfeasance if he does not verify investments and accepts the certificate of a stockbroker instead. (iii) The auditors argued that “in a money lending business it did not matter how old the debts were, because in the long run people would come back and pay in order to be able to obtain further advances.” The Judge decided that the auditors were guilty of negligence in their duties for: (a) Not reporting the insufficiency of the provision for bad and doubtful debts to the shareholders; and. He, therefore, sued the auditors for compensation against damages sustained. 13. Superintendent and Remembrance of Legal Affairs, Bengal Vs. Akhil Bandhu Guha and Others (1936): (1) The managing directors of Dhakeswari Cotton Mills Ltd. were also the managing directors of a newly formed company named East Bengal Jute and Cotton Mills Ltd. (2) The amount against the item ‘Deposit by others’ shown in the balance sheet of the first Company was actually arrived at by deducting the loan amount advanced to the other new company. 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