part three audit responsibilities. structure of seminar 1.auditing standards 2.professional auditing...
TRANSCRIPT
Part Three
Audit Responsibilities
Structure of Seminar
bull 1Auditing Standards
bull 2Professional auditing standards system
bull 3Fundamental principles of professional ethics
bull 4Audit Quality
bull 5Audit liability
1Auditing Standards
bull From 2004 Auditing amp Assurance Standards Board (AUASB) constituted under the governmentrsquos Financial Reporting Council (FRC) issues Australian Auditing Standards (ASAs)
bull From 1 July 2006 Australia fully adopted international auditing standards (ISAs)
bull Standards a minimum level of care
2Professional auditing standards system
1Auditing standards
-National auditing standards
-Independent Auditing Standards
-Internal auditing standards
-International Standards on Auditing
3Fundamental principles of professional ethics
The CPArsquos Code of ethics and conduct sets out five
fundamental principles of professional ethics and
provides a conceptual framework for applying those
principles Members must apply this conceptual
framework to identify threats to compliance with the
principles evaluate their significance and apply
appropriate safeguards to eliminate or reduce them so
that compliance is not compromised
bull The fundamental principlesbull Members of the CPA must comply with the
fundamental principles set out in the Code of ethics and conduct (integrity objectivity professional competence and due care confidentiality and professional behaviour)
bull Confidentialitybull Confidentiality requires members to refrain from
disclosing information acquired in the course of professional work except where
- -Consent has been obtained from the client employer or other proper source or
--There is a public duty to disclose or
--There is a legal or professional right or duty to disclose
bull A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party
bull In general where there is a right (as opposed to a duty) to disclose information a member should only make disclosure in pursuit of a public duty or professional obligation
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Structure of Seminar
bull 1Auditing Standards
bull 2Professional auditing standards system
bull 3Fundamental principles of professional ethics
bull 4Audit Quality
bull 5Audit liability
1Auditing Standards
bull From 2004 Auditing amp Assurance Standards Board (AUASB) constituted under the governmentrsquos Financial Reporting Council (FRC) issues Australian Auditing Standards (ASAs)
bull From 1 July 2006 Australia fully adopted international auditing standards (ISAs)
bull Standards a minimum level of care
2Professional auditing standards system
1Auditing standards
-National auditing standards
-Independent Auditing Standards
-Internal auditing standards
-International Standards on Auditing
3Fundamental principles of professional ethics
The CPArsquos Code of ethics and conduct sets out five
fundamental principles of professional ethics and
provides a conceptual framework for applying those
principles Members must apply this conceptual
framework to identify threats to compliance with the
principles evaluate their significance and apply
appropriate safeguards to eliminate or reduce them so
that compliance is not compromised
bull The fundamental principlesbull Members of the CPA must comply with the
fundamental principles set out in the Code of ethics and conduct (integrity objectivity professional competence and due care confidentiality and professional behaviour)
bull Confidentialitybull Confidentiality requires members to refrain from
disclosing information acquired in the course of professional work except where
- -Consent has been obtained from the client employer or other proper source or
--There is a public duty to disclose or
--There is a legal or professional right or duty to disclose
bull A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party
bull In general where there is a right (as opposed to a duty) to disclose information a member should only make disclosure in pursuit of a public duty or professional obligation
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
1Auditing Standards
bull From 2004 Auditing amp Assurance Standards Board (AUASB) constituted under the governmentrsquos Financial Reporting Council (FRC) issues Australian Auditing Standards (ASAs)
bull From 1 July 2006 Australia fully adopted international auditing standards (ISAs)
bull Standards a minimum level of care
2Professional auditing standards system
1Auditing standards
-National auditing standards
-Independent Auditing Standards
-Internal auditing standards
-International Standards on Auditing
3Fundamental principles of professional ethics
The CPArsquos Code of ethics and conduct sets out five
fundamental principles of professional ethics and
provides a conceptual framework for applying those
principles Members must apply this conceptual
framework to identify threats to compliance with the
principles evaluate their significance and apply
appropriate safeguards to eliminate or reduce them so
that compliance is not compromised
bull The fundamental principlesbull Members of the CPA must comply with the
fundamental principles set out in the Code of ethics and conduct (integrity objectivity professional competence and due care confidentiality and professional behaviour)
bull Confidentialitybull Confidentiality requires members to refrain from
disclosing information acquired in the course of professional work except where
- -Consent has been obtained from the client employer or other proper source or
--There is a public duty to disclose or
--There is a legal or professional right or duty to disclose
bull A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party
bull In general where there is a right (as opposed to a duty) to disclose information a member should only make disclosure in pursuit of a public duty or professional obligation
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
2Professional auditing standards system
1Auditing standards
-National auditing standards
-Independent Auditing Standards
-Internal auditing standards
-International Standards on Auditing
3Fundamental principles of professional ethics
The CPArsquos Code of ethics and conduct sets out five
fundamental principles of professional ethics and
provides a conceptual framework for applying those
principles Members must apply this conceptual
framework to identify threats to compliance with the
principles evaluate their significance and apply
appropriate safeguards to eliminate or reduce them so
that compliance is not compromised
bull The fundamental principlesbull Members of the CPA must comply with the
fundamental principles set out in the Code of ethics and conduct (integrity objectivity professional competence and due care confidentiality and professional behaviour)
bull Confidentialitybull Confidentiality requires members to refrain from
disclosing information acquired in the course of professional work except where
- -Consent has been obtained from the client employer or other proper source or
--There is a public duty to disclose or
--There is a legal or professional right or duty to disclose
bull A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party
bull In general where there is a right (as opposed to a duty) to disclose information a member should only make disclosure in pursuit of a public duty or professional obligation
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
3Fundamental principles of professional ethics
The CPArsquos Code of ethics and conduct sets out five
fundamental principles of professional ethics and
provides a conceptual framework for applying those
principles Members must apply this conceptual
framework to identify threats to compliance with the
principles evaluate their significance and apply
appropriate safeguards to eliminate or reduce them so
that compliance is not compromised
bull The fundamental principlesbull Members of the CPA must comply with the
fundamental principles set out in the Code of ethics and conduct (integrity objectivity professional competence and due care confidentiality and professional behaviour)
bull Confidentialitybull Confidentiality requires members to refrain from
disclosing information acquired in the course of professional work except where
- -Consent has been obtained from the client employer or other proper source or
--There is a public duty to disclose or
--There is a legal or professional right or duty to disclose
bull A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party
bull In general where there is a right (as opposed to a duty) to disclose information a member should only make disclosure in pursuit of a public duty or professional obligation
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
bull The fundamental principlesbull Members of the CPA must comply with the
fundamental principles set out in the Code of ethics and conduct (integrity objectivity professional competence and due care confidentiality and professional behaviour)
bull Confidentialitybull Confidentiality requires members to refrain from
disclosing information acquired in the course of professional work except where
- -Consent has been obtained from the client employer or other proper source or
--There is a public duty to disclose or
--There is a legal or professional right or duty to disclose
bull A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party
bull In general where there is a right (as opposed to a duty) to disclose information a member should only make disclosure in pursuit of a public duty or professional obligation
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
--There is a public duty to disclose or
--There is a legal or professional right or duty to disclose
bull A member acquiring information in the course of professional work should neither use nor appear to use that information for his personal advantage or for the advantage of a third party
bull In general where there is a right (as opposed to a duty) to disclose information a member should only make disclosure in pursuit of a public duty or professional obligation
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
bull A member must make clear to a client that he may only act for him if the client agrees to disclose in full to the member all information relevant to the engagement
bull Where a member agrees to serve a client in a professional capacity both the member and the client should be aware that it is an implied term of that agreement that the member will not disclose the clients affairs to any other person save with the clients consent or within the terms of certain recognised exceptions which fall under obligatory and voluntary disclosures
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
bull If a member knows or suspects his client to have committed money-laundering treason drug-trafficking or terrorist offences he is obliged to disclose all the information at his disposal to a competent authority Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts
bull Integrity objectivity and independence
The fundamental principles require that members behave with integrity in all professional and business relationships and they strive for objectivity in all their professional and business judgements Objectivity is a
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
state of mind but in certain roles the preservation of objectivity has to be shown by the maintenance of
independence from those influences which could impair objectivity
It is very important that the auditor is impartial and independent of management so that he can give an objective view on the financial statements of an entity The onus is always on the auditor not only to be ethical but also to be seen to be ethical
Independence and objectivity matter because of
(a) The expectations of those directly affected particularly the members of the company The audit
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
should be able to provide objective assurance on the truth and fairness of the financial statements that the directors can never provide
(b) The public interest Companies are public entities governed by rules requiring the disclosure of information
bull What can the auditor do to preserve objectivity The simple answer is to withdraw from any engagement
where there is the slightest threat to objectivity However there are disadvantages in this strict approach
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
--Clients may lose an auditor who knows their business
-- It denies clients the freedom to be advised by the accountant of their choice
bull A better approach would be to consider whether the auditors own objectivity and the general safeguards operating in the professional environment are sufficient to offset the threat and to consider whether safeguards over and above the general safeguards are required for example specified partners or staff not working on an assignment
bull However the ultimate option must always be withdrawing from an engagement or refusing to act
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
bull Threats to independence and objectivity Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances These generally fall into five categories
bull 1048696 Self-interestbull 1048696 Self-reviewbull 1048696 Advocacybull 1048696 Familiaritybull 1048696 Intimidation
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
4Audit Quality
bull DeAngelo [1981] ndash ldquothe ability to detect misstatements plus to report the misstatementsrdquo
bull In other words Quality = Competence + Independence
bull Both are essential
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
5Audit liability
bull 1) The Legal Environmentbull Auditors as professionals have a fiduciary duty to
act in the best interests of shareholdersbull Auditors are accountable in law for their professional
conductbull Alleged audit failures can result in litigation against
audit firmsbull Requirement to hold a practising certificate imposes
obligation to have professional indemnity (PI) insurance for possible liability
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Audit liability
bull A ldquohardrdquo insurance market bull This source of ldquocompensationrdquo (insurance) creates a
perception of auditors having ldquodeep pocketsrdquo thus claims against auditors
bull This is consistent with the insurance hypothesis of the demand for auditing
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
The ldquoLitigation Crisisrdquo
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
The Litigation Crisis
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Settled Cases
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Out of Court Settlements
bull Protection of auditorsrsquo reputation
BUTbull Confidence problems not addressedbull Auditing standards may not be adjustedbull Audit expectations gap may not be addressedbull Lack of impetus for regulatory changebull Issues related to audit quality amp independence are not
publicly analysed
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Audit liability
bull 2) Bases of Liabilitybull Contract lawbull Engagement letter is contract between auditor amp
directorsbull Common law (tort of negligence) (next slide)bull Trade Practices lawbull S52 prohibits deceptive amp misleading conductbull Issuing a lsquocleanrsquo opinion when a qualified opinion is
warranted
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Audit liability
3)Professional Negligencebull Action for damages may also be brought against an
auditor under tort of negligencendash Conduct that is careless or unintentional amp breaches
duty of carendash Extension of Donoghue amp Stevenson (1932) to
financial injurybull Negligent misstatementbull What are the essential elementsbull What constitutes due carebull To whom does the auditor owe a duty of care
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
What is Due Care
bull Kingston Cotton Mill Co (1896)bull London amp General Bank (1895)bull The auditor is not necessarily answerable for an error
of judgment provided heshe exercises the skill and care of a reasonably competent and well-informed member of the profession
bull A ldquowatchdogrdquo not a ldquobloodhoundrdquobull Pacific Acceptance Case (1970)bull ldquoReasonable skill and carerdquo calls for changed
standards to meet changed conditions or changed
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
What is Due Care
understanding of dangers and in this sense standards are more exacting today than in 1896
bull Standards are thus a minimum standard of carebull HIH Royal Commission emphasised the fiduciary
duty of auditors as users rely on their integrity
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Duty to Third Parties
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Duty to Third Parties
bull Esanda ndash good news for auditors but is it socially desirable
bull Liability of experts for consequences of negligent advice
bull Common law remains complex and uncertain due to differences in judicial opinions amp interpretation
bull Courts must balance rights amp responsibilities of auditors investors amp wider society
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Audit liabilitybull 4)Reform of Legal Liabilitybull Professional Standards Legislation (PSL) 2004bull Co-ordinates state amp territory level legislation to be
nationally consistentbull Limits civil liability for misleading amp deceptive
conductbull Occupational schemes registered under PSLbull Must have minimum PI cover of $500000bull A statutory cap on liability relative to fees chargedbull Proportionate liability replaces joint amp several
liabilitybull Contributory negligence (AWA Case) now irrelevant
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Reform of Legal Liability
bull CLERP 9 Act (2004)bull Companies can be registered as an auditorbull Authorised Audit Companybull Each director must be a registered auditorbull AAC must have adequate PI coverbull Suggested cover to be 10 times the maximum
engagement feebull Reforms designed to address possible dysfunctional
consequences of litigation and insurance crises
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Audit liability
bull 5)Avoidance of Litigationbull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
bull Engagement lettersndash Audit amp non-audit servicesndash Clearly define scope amp responsibilitybull Investigate prospective clients thoroughlyndash The first line of defencebull Comply fully with professional standardsbull Recognise their limitations ndash a minimum standard
only
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-
Audit liability
bull 6) Conclusionsbull Business failure ne audit failurebull Litigation is a significant amp costly issue for the
professionbull Auditors must take great care to protect themselves
from litigation by complying with professional pronouncements using sound judgment and maintaining quality amp independence
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- Slide 29
- Slide 30
- Slide 31
- Slide 32
-