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Auditors Liabilities

Statutory auditors are responsible for providing accurate audit reports and may face liability for negligence if they fail to exercise reasonable care, leading to financial losses for clients or third parties. Auditors can be held liable under common law, contract law, and statutory provisions, including potential criminal liability for fraudulent activities. The Companies and Allied Matters Act 2020 outlines specific duties and responsibilities for auditors, emphasizing the need for diligence and skill in their work.

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28 views3 pages

Auditors Liabilities

Statutory auditors are responsible for providing accurate audit reports and may face liability for negligence if they fail to exercise reasonable care, leading to financial losses for clients or third parties. Auditors can be held liable under common law, contract law, and statutory provisions, including potential criminal liability for fraudulent activities. The Companies and Allied Matters Act 2020 outlines specific duties and responsibilities for auditors, emphasizing the need for diligence and skill in their work.

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© © All Rights Reserved
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AUDITORS’ LIABILITY

INTRODUCTION

Statutory auditors perform audits and sign audit reports. These reports are
the auditors’ opinion on the truth and fairness of financial statements. The
auditor has responsibilities to shareholders and other third parties who may
place a level of reliance on the financial statements certified by the auditor. If
the auditor fails to meet the standard of care required and consequently a
loss is suffered by any of the affected parties remedy can be obtained
against the auditors in a constituted court. As his work is relied upon by
others, the auditor clearly has a responsibility to do his work honestly and
carefully. He must be honest, that is, he must not certify what he does not
believe to be true, and he must take reasonable care and skill before he
believes that what he certifies is true.

What is “reasonable care and skill” in any given case depends on the
circumstances and is very difficult to assess. What is clear is that:

a. an auditor may fail to exercise sufficient skill and care.

b. consequently, fraud or error may not be uncovered, or he may fail to


discover that the accounts fail to show a true and fair view, or may contain a
material misstatement

c. consequently, somebody who relies on the work of the auditor may lose
money

d. this loss of money flows from the failure of the auditor to do his job
properly.

Auditors may be liable for professional negligence. In recent years, this has
become an issue of great concern to auditors. Some audit firms have
resorted to taking professional indemnity insurance to safeguard their
businesses, which in concrete terms, does not solve the problem. Auditors
can also be liable under statute and can face penalty under the criminal law
for deception and reckless negligence. It is also not uncommon for auditors
to be held liable under civil law for damages. What is more, auditors by
nature of their contractual relationship with their clients, face potential
liability under the law of contract. A client may bring an action under
contract law to enforce auditors’ responsibility for loss which has occurred
through the failure of the auditor to carry out their duties imposed by the
contract with the client. Furthermore, an auditor may be held liable under the
law of tort for duty of care, especially, where a third party is involved.
AUDITORS’ LIABILITY FOR NEGLIGENCE UNDER COMMON LAW

An auditor will incur liability under common law if he is found negligent in the
performance of his duty and the client suffers a loss as a result of such
negligence. At the same time, where loss has resulted, but no negligence can
be attributed to the auditor, he cannot be held liable for damages. Common
law may be referred to as the generally accepted code of conduct, or
customs in interpersonal relationship. It is based on whatever is common in
different cultural practices of the land.

What is Negligence?

Negligence means some act or omission which occurs because the person
concerned (e.g. an auditor) failed to exercise that degree of reasonable skill
and care which is reasonable to be expected in the circumstances of the
case. What is reasonable is not what a super careful and expert auditor
would do but what an ordinary skillful person would do in the circumstances.

Liability under Contract

When auditors accept appointment, they enter a contract which imposes


certain obligations on them. These obligations arise from the terms of the
contract. Both express and implied terms of contract impact upon auditors.
In the case of a statutory audit, the Company Laws (i.e., Companies and
Allied Matters Act 2020) prescribe the auditors’ duties, responsibilities and
rights and express terms of the audit. However, contract cannot override the
statutory provisions.

The implied terms which the law will impute into an audit contract are as
follows:

a. The auditors have a duty to exercise reasonable care;

b. The auditors have a duty to carry out the work required with reasonable
expediency; and c. The auditors have a right to reasonable remuneration.

STATUTORY LIABILITY

Auditors may be liable for financial damage in respect of civil offences of


misfeasance and breach of trust. This normally happens when the auditors
have misused their position of authority for personal gain. Thus, the law
made the following provisions:
a. Under Section 415(1) of CAMA 2020, a company’s auditor shall in the
performance of his duties exercise all such care, diligence, and skill as is
reasonably necessary in each particular circumstance.

b. Under Section 415(2) states that where a company suffers loss or damage
as a result of the failure of its auditor to discharge the fiduciary duty imposed
on him by subsection (1) of this section, the auditor shall be liable for
negligence and the directors may institute an action for negligence against
him in the court.

c. If the directors fail to institute an action against the auditor under


subsection (2) of this section, Section 415(3) states that any member may do
so after the expiration of thirty (30) days’ notice to the company of his
intention to institute such action.

For a company that is in the process of winding up, the auditor may be held
liable “as an officer” of the company and if found guilty of misfeasance, he
may be required to contribute to the extent of the loss arising from the
breach of trust.

CRIMINAL LIABILITY UNDER SECTION 436 OF THE NIGERIA CRIMINAL


CODE

If any promoter, director, officer, or an auditor of a company makes,


circulates, or publishes or concurs in the making, circulating, or publishing of
any written statement or account which to his knowledge is false, in material
particular in order to deceive or defraud any person to invest in such a
company, such promoter, director, officer or auditor shall be guilty of felony
and liable to an imprisonment of seven (7) years.

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