Liabilities of Auditors

Liabilities of Auditors


All auditors can be sued in a civil court when they have breached their position of trust e.g. if an auditor uses information acquired during the course of the audit to make financial gain , then in such a case he or she can be sued for breaching his position of trust and confidentiality.


An auditor to a limited company is an agent of the shareholders. He is required to exercise reasonable care and, skill in the performance of the work entitled to him, and if he fails to do, then the question of his liability with reference to the negligence arises. This matter is discussed in the light of legal provisions as under

(a) Where an auditor is proved to be negligent but no loss is sustained by his client arising out of his negligence, he is not liable

(b) An auditor cannot restrict his liability by entering into an agreement as his duties are defined and laid down in the Companies Ordinance, 1984, and therefore any such agreement (if executed) would be against the law and will be void. He will be liable for damages in spite of such an agreement.

(c) An indemnity clause inserted in the articles of a company, by which the directors, managing agents, auditor and other officers of the company are relieved from liability has been declared void by Section 194. However, the court may relieve an auditor of liability for negligence, or misfeasance if it is proved that he acted honestly and reasonably.

(d) If the auditor fails to perform his job with reasonable care and skill and consequently his client suffers a loss due to his negligence, he is liable to make good the loss on an action being taken against him by the company.


After a company has gone into liquidation, misfeasance proceedings can be instituted against the liquidator, creditor , A contributory of the company. The term 'misfeasance' means breach of duty involving the company in a loss. Under Section 412 when a company in liquidation, its past and present directors, promoters, managing agents and auditors are liable to make good all losses sustained by the company on account of negligence of duty or breach of trust if misfeasance proceedings are initiated against him within the prescribed time.

3. Legal liabilities of auditors

Auditors are supposed to perform their work in an honest and careful manner since they can be held liable for negligence in the following ways:

a) They don't carry out their work as required by the ISA

b) They fail in the duty of protecting the interest of the various users of the financial statements i.e. any person who relies on his work.

c) They don't carry out their work with due care and skill i.e. what an ordinary skilled man or woman would do in that circumstance.

The auditor's liability falls under three categories:
i) To their clients (company itself)
ii) To third parties in case of negligence
iii) Civil and criminal liabilities


An auditor may be liable for negligence not only under the law of contract but also in the law of tort i.e. if a person to whom he owed a duty of care has suffered financial loss as a result of the auditor's negligence. For the third party to succeed he must prove the following:
• The auditor owed him a duty of care
• The auditor was negligent
• He has suffered financial loss resulting from the auditor's negligence.

Section 46 of the Companies Act provide that an auditor shall be criminally liable if he willingly makes a material false statement in any report, certification or in the financial statement with the intention to deceive and mislead. Examples of criminal liabilities include:
i) The auditor accepts appointment when he is ineligible to do so or continue in office after becoming ineligible.
ii) The auditor obtains the advantage of deception.
iii) The auditor falsifies accounting records or documents.
iv) When the auditor publishes misleading statements intended to deceive members.
v) When an auditor misappropriates a clients' property.


There is a contractual relationship between the auditor and his client .Under this contract it is implied that the auditor will carry out the work with a reasonable degree of skill and care. The degree of care and skill required will mainly depend on the nature of work undertaken. Generally if the auditor has complied with ISA it is difficult to prove that he was negligent. In the absence of suspicious circumstances the auditor will not be liable for failing to uncover fraud and error which could not be discovered by exercise of normal skill and care. The auditor can be accused of negligence if:
• He fails to detect fraud or error that he could have reasonably detected i.e. material misstatement
• He fails to comply with the Generally Accepted Auditing Standards (GAAS) and practices e.g. attending stock take, circularizing debtors, writing to the bank etc.
N.B. For the client to succeed in a claim for financial loss he must satisfy the court in relation to three matters:
i) That there existed a duty of care enforceable by the law
ii) That where the duty existed the auditor was negligent in the performance of that duty judged by acceptable professional standards
iii) That the client suffered some financial loss as a direct consequence of the auditor's negligence.

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