Usually, the company maintains a full list of all of these individuals by name. Known users of the financial statements consist of the actual shareholders and creditors of the company. Who exactly are auditors responsible to? Can any third party sue an auditor, or only certain classes of parties? It is generally known that auditors are responsible to two groups of third parties: 1) known users of the financial statements, and 2) a limited class of foreseeable users who will rely on the audited financial statements. The Legal Liability of Auditors to Third Parties If an incorrect audit report is issued, then this undermines the government’s duty to help protect investors. The government requires public company financial statements to accurately reflect the company’s actual results. The auditor has knowingly issued an incorrect audit report. Government: Fraud, also known as Gross Negligence.By not identifying a material misstatement, financial statement users are harmed, as they may rely on the published financials when making an investment decision. The auditor has failed to use due care and has failed to identify a material misstatement. Financial Statement Users: Negligence.Auditors obtain an engagement letter and any breach of the stated terms can be a valid reason for legal action by the company against the auditor. Let us consider the possible entities that may sue an auditor and the possible reasons for a lawsuit. Sources of Legal Liability for an Auditor The auditor may be liable for negligence, bad faith, or dishonesty, but not for mere errors in judgment. The auditor undertakes his task(s) with good faith and integrity but is not infallible.The auditor has a duty to employ such skill with reasonable care and diligence.The auditor must possess the requisite skills to evaluate financial statements.Due care is the “prudent person” concept. One code of professional conduct states that auditors must go about their business with due care. Without independent and competent auditors, many fraud cases worldwide would’ve gone unnoticed, notwithstanding all the other cases that are still undiscovered. Like other professionals, they can face civil and criminal liabilities in the performance of their duties. Financial auditors are highly important people because, ultimately, they are responsible for enhancing the reliability of financial statements for external users. Updated JanuWhat is the Legal Liability of Financial Auditors?Ĭoncerns about the legal liability of auditors continue to grow every day.
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