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