Auditors Liability During Time of Crisis

Discuss about the Auditors Liability During Time of Crisis.

Liability is for the negligence on the part of the auditors. It would amount to a defence to an action wherein there is a negligence on the part of the professional accountants and the auditors. An auditor is the person who is required to exercise a huge amount of judgement and experience and professional care when it comes to expressing his opinion on the fairness of the financial statements. But when he fails to comply with the above, then he incurs a liability which is payable to the third party (Acca global, 2016).

Generally speaking, an auditor is responsible for both the criminal and the civil offences. The criminal offences takes place when an auditor has breached the rules, regulations and the laws that have been imposed by the government. In the other words, the criminal law is the one that revolves around the entities and the state. Whereas the civil law is the law that deals with the disputes that takes place between the various individuals and the organisations.

The following are the various types of the liabilities that an auditor is exposed to:

Criminal offences: an auditor is governed by the rules and the laws that have bene laid down by the country in which they function. Hence, under the criminal law, the auditors are prosecuted for the acts such as the frauds and the offences like insider trading. An audit is subject to the various legislations that have been prescribed by the Companies Act. This may go on to include the sections that govern an auditor and how they have been appointed and removed and also functions of the auditors. One of the offences from the Companies Act is the one that causes a report under the section 495 which is the auditor’s report on the annul accounts of the company. This further includes the matter that could be misleading, false or deceptive in any manner possible. This is as per the section 507. This means that the auditors would be prosecuted in the criminal court for either expressing an inappropriate opinion or the expression of the reckless opinion.

Civil offences: there are mainly 2 piece of law that comprise of this. This is the civil law which is of a particular significance to the professional of audit. Under the contract of law, the parties seek the remedy for the breach of the obligations that arise due to the contract. Hence, the shareholders could easily seek remedy from the auditor in case they fail to comply with the terms of the letter of the engagement. In order to illustrate, the auditor could be used by the shareholders. The same was the case with the settlement undertaken by PWC to the shareholders of the Tyco. Under the law of Tort includes the liability on the part of the auditors in case they breach their duty of care towards the third party that suffers due to the lack of judgement or negligence on the part of the auditors (Acca global, 2016).

Time of crisis:

During the time of the crisis, an auditor is duty bound to carry on his duty with utmost care. This is assumed to be necessary during the time of crisis. This is the period of tension. These are the times that are every much critical in the society. The economic crisis is mainly difficult due to the economic activities that break of change the slowdown, stagnation or the decline in the economic activity. The financial crisis is the form of an economic crisis and reflects the lack of the trust in the system along with a lack of order in the market mechanisms. The financial crisis could be considered as an opportunity for the purposes of correcting the various different parts of the financial system which have led to the various shortcomings that have caused the lack of the trust in the system along with a lack of order in the market mechanisms. The various measures that the different governments and the international institutions but that would influence the time that is very necessary for the purposes of overcoming such crisis (Sikka, 2009). But then it is also true that the same is quite important for the long term economic change. In the short term, the main issues concern the adjustment of the principles that help in the guiding of the international financial system reforms. Along with those that relates with the transparency, for the improvement of the regulations on the various different securities accounts. There is a need and the requirement to ensure that the markets are being regulated and then there are companies and the financial products that makes sure that the financial markets are integral and are bale to strengthen the cooperation between the financial institutions in the world. The financial system is required to increase the amount of the transparency when it comes to a number of different aspects. The first being the fact that there are many of the financial players in the market such as the hedge funds that play a major role in the mediation but it is also true that they are not somewhat bound by the strict rules when it comes to reporting. There is an establishment of a number of different activities and the way they are reported when it comes to the reduction of the volatility when the conditions in the market gets worse. There has been development of the new financial instruments becomes very tough since the determination of the prices of these financial instruments becomes difficult. But then it is also true that at the same time, there are questions that are raised by the investors that bear this risk (menthe, 2016).

Then there is another problem with the review of the model of the investment portfolio and the identifying of the various ways that help in the prevention of these risks. The ISA 200 which is concerned with the Objective and general principles governing an audit of financial statements, the main aim of which is the audit of the financial statements that have been prepared by the entity so as to enable the auditor to express an opinion on the extent to which the financial statements have been prepared. This is in all the material respects and as per the financial reporting framework that are applicable at that time. The process of an audit is always carried out as per the procedures and the legal along with the professional standards. The report by the auditor has to be signed and these have to be sent to the owners or the shareholders of the company. As being professionally responsible for the purposes of issuing an opinion on the financial statements of the entity, an auditor is always subject to a liability. When it comes to the performance of the mission of an audit, the financial auditor assumes that he has the great responsibility due to the presence of the terms of the engagement of an audit. Along with this, there is the nature of the professional services that have been rendered. The first assumption is that of the liability of an auditor of the engagement of the audit. When he signs the letter of engagement, he defines the terms and the type of the mission that he has undertaken for the purposes of the auditing standards, insurance and the review, as have been applicable.  For the purposes of establishment of the objective mission which is the identification of the financial statements that have to be audited and there is a reporting of the framework of the accounts under which the same were made. When it comes to the determination of the nature, duration and the extent of the procedures of an audit and when it comes to the evaluation of the audit evidence and the results, an auditor must exercise his professional scepticism when it comes to the recognizing whether these financial statements are free from the material misstatements or not (Mitton, 2002).

There are times in which the audit procedures that have been undertaken by an auditor somewhat prove to be ineffective and they are not able to detect the material misstatements that are concealed by the top most management which comprises of the people that are charged with governance, the employees and the third parties. This results in the risks that an auditor is exposed to and it is also possible that he may not be able to discover the material misstatements in the financial statements. There is a high degree of correlation between the result that have been obtained under the stated procedures and the opinion that has been expressed by the auditor in his audit report.

The first and the main responsibility of an auditor is to express an opinion on the fairness of the financial statements and confirming whether the facts stated in the financial statements have been reflected correctly, fairly and contains all the material aspects and the transactions of the financial year to which it reflects. There are many of the cases wherein the auditor is not able to express his opinion since his mission was limited or his powers were made limited by the management of the entity. In case, an auditor gives an adverse opinion, then it merely means that the financial statements does not contain any true facts and figures. The liability of the auditor could increase due to the occurrence of the vents after the date of the balance. IAS 10 which talks about the Events that takes place after the date of the balance sheet would mean that these are the situations that could both be favourable or unfavourable. And then there are many of the conditions that indicates whether the adjustment of the changes are required or not. The manager always considers the materiality of the events before deciding and then adjusts the financial statements.

In the case, wherein it is difficult to determine the adjustments, then the fair values of the stated items have to be established. This is the sole responsibility of the auditor. It is therefore, that IFAC emphasises on the quality control of the work of an auditor since each of the audit company or the individual cabinet would ensure that all has been done well. The quality control is very well organised since there are some of the detailed and written procedures. They are reliable and hence, are very well able to eliminate the risk of the error during the mission. All the quality control work is well documented and signed by the auditor. The audit program is completed and is signed then.

The economic crisis may occur when the entities misstate their revenues and show an increased amounts of the profits for the purposes of attracting the investors. But they fail to understand the fact that this manipulation would be detected by the auditor and then he would report these facts to the shareholders or to the owners of the entity and then they would be in trouble. In this strong competition, each and every entity is striving hard to survive and for this, they are ready to indulge themselves in any act necessary and then that blows up in their face.

During the times of the economic crisis, the dependence on the work increases since the entities are wanting to manipulate their profits and show an increase in the earnings and also indulge themselves in revenue management or earnings management. As and when these are discovered by the auditor, the profits of the company falls and then there is a loss of trust of the investors in the company. This could lead to loss of the investment that was made by the investors in the company. This could hit the market since there would be a fall in the investments of the company and their prices would be affected (Acca global, 2016).

But this is the case wherein an auditor has disclosed the errors of the frauds in the financial statements of the company. What about the case when he fails to discover the same? (Todea, 2009).

The preparation of the financial statements is the sole responsibility of the management of the entity. Also, the maintenance of the internal controls is the sole responsibility of the management. An auditor would only extend his audit procedures to determine the errors and the frauds that would exist in the financial statements but sometimes he may not be able to discover the same since the errors and the fraud have been deeply laid down in the financial statements. In such cases, he may not be able to discover the frauds and the errors. But this in no case, means that he did not exercise his skill, judgement or professional care. But even then he exposed himself to the liability and damages by the third parties who had relied on his opinion (Samsonova, 2010).

Conclusion:

Yes, it is true that during the times of the global crisis, the role of the auditors and the accountants re always questioned. But even after this, there has been no question on the requirement of the audit for the larger companies. This just shows the importance of the role of the quality of an audit for the purpose of building trust in the statements of the company. The role of the auditor must expand. The bigger firms would be inclined in overtaking the enhanced role especially when there is a corresponding liability issue is required to be addressed (Prezi, 2016).

Recommendation:

There must be a change in the mind-set of the people. PWC had announced the creation of the head of the reputation as being the direct response to the various criticisms that it has faced in the Lords report. The firm stated that the debate of the reputation and the regulation of the profession is one of the main concerns of the PWC (E publications, 2016).

There has been an increase in the tendency of the people to blame the auditor for the failure on the part of the directors and the senior most management for the supervision of the business or even to warn them as against the business decisions that have been made without giving them a thought. This not a part of the function of audit (Cabral, 2016).

The global crisis due to the unusual nature that it has means that an auditor has to be aware of the prime importance of the fact of the judging of the different risks when it comes to the assessment of the companies. This holds importance due to the presence of the concept of going concern. The judgement of these of the risks are far more complicated and more serious for the auditor during the period of the crisis. But in the professional terms, there are various methodologies available and the solution to these problems are now possible (Pal, 2016).

References:

Cabral, (2014). Auditor Liability and Legal Lacunae in relation to Risk Modelling Assumptions and Financial Institution Accounts in the context of the Financial Crisis, University of Zurich, [Online] Available at: http://www.academia.edu/8109172/Auditor_Liability_and_Legal_Lacunae_in_relation_to_Risk_Modelling_Assumptions_and_Financial_Institution_Accounts_in_the_context_of_the_Financial_Crisis [Accessed 14 Sep. 2016].

Samsonova, (2010). Re-thinking auditor liability: The case of the European Union’s regulatory reform. [Online] Available at: http://apira2010.econ.usyd.edu.au/conference_proceedings/APIRA-2010-241-Samsonova-Re-thinking-auditor-liability.pdf [Accessed 14 Sep. 2016].

Free (1999), Univeristy of New South Wales, Limiting Auditors’ Liability [Online] Available at: http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1161&context=blr [Accessed 14 Sep. 2016].

ACCA Global, (2016). Auditor liability | ACCA Global. [Online] Accaglobal.com. Available at: http://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/auditor-liability.html [Accessed 14 Sep. 2016].

ACCA Global, (2016). Audit under fire: a review of the post-financial crisis inquiries. [Online] Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/pol-af-auf.pdf [Accessed 14 Sep. 2016].

Pal, University of Miskolc, Faculty of Economics, (2016). The Impact Of The Economic Crisis On Auditing. [Online] Available at: http://www.matarka.hu/koz/ISSN_1588-6735/GTK_vol_8_no_1_2010_eng/ISSN_1588-6735_GTK_vol_8_no1_2010_eng_131-142.pdf [Accessed 14 Sep. 2016].

Korda mentha, (2016). Audit negligence. [Online] Available at: http://www.kordamentha.com/docs/for-publications/issue2011-04-auditnegligence.pdf?Status=Master [Accessed 14 Sep. 2016].

Malb, (2016). The role of the Auditors Liability in the global financial crisis. [Online] Available at: https://prezi.com/vsujbqrl8kdw/the-role-of-the-auditors-liability-in-the-global-financial-crisis/ [Accessed 14 Sep. 2016].

Mitton, (2002), Volume 64, Issue 2 A cross-firm analysis of the impact of corporate governance on the East Asian financial crisis, Journal of financial economics [Online] Available at: http://www.sciencedirect.com/science/article/pii/S0304405X02000764 [Accessed 14 Sep. 2016].

Sikka, (2009) Financial crisis and the silence of the auditors, Accounting, Organizations and Society, Volume 34, Issues 6–7 [Online] Available at: http://www.sciencedirect.com/science/article/pii/S036136820900018X [Accessed 14 Sep. 2016].

Todea, (2009). The Impact Of The Economic Crisis On Auditing, Annales Universitatis Apulensis Series Oeconomica, 11(1), 2009, [Online] Available at: http://www.oeconomica.uab.ro/upload/lucrari/1120091/21.pdf [Accessed 14 Sep. 2016].

ACCA global, (2016). Professional liability of accountants and auditors. [Online] Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-members/2012/2012p/Prof_liability.pdf [Accessed 14 Sep. 2016].

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