Legal liability

• How did the economic conditions of the 1970s affect auditor lawsuits?

  Increased lawsuits due to economic slump
• What major event in 2002 refocused attention on auditors?

  High-profile frauds leading to Sarbanes-Oxley Act
• What is the "deep pocket" syndrome in relation to auditors?

  Clients seek compensation from insured auditors
• What is the practice of contingency legal fees?

  No fee if the case is lost
• How does the jury system affect auditor lawsuits?

  Juries apply layman’s standards in judgments
• What is the "audit expectation gap"?

  Difference between public expectations and auditor responsibilities
• What do users of financial statements mistakenly believe about unqualified audit opinions?

  They assure management and no fraud exists
• What contributes to the audit expectation gap?

  Unrealistic user expectations and auditor performance issues
• What is the difference between business failure and audit failure?

  Business failure is financial; audit failure is erroneous opinion
• What is audit risk?

  Risk of issuing an unqualified opinion on misstated statements
• What are some measures to reduce exposure to lawsuits at the profession level?

  Establish stronger standards and educate users
• What is one measure to reduce exposure to lawsuits at the individual firm level?

  Hire qualified personnel and train them properly
• What are the two classes of law relevant to auditors' liabilities?

  Common law and statutory law
• What is statutory law?

  Written law enacted by the legislative branch
• What duty do auditors have under statutory law?

  To report any violations of law encountered
• What is common law?

  Case law developed by judges over time
• What must a plaintiff prove to bring legal action against auditors?

  Duty of care, breach, causal relationship, damage
• What is negligence in the context of auditors?

  Failure to exercise due professional care
• What is the difference between ordinary negligence and gross negligence?

  Ordinary negligence lacks due care; gross negligence is extreme
• What are express terms in a contract?

  Provisions clearly stated in the contract
• What are implied terms in a contract?

  Terms left unstated but considered obvious
• What must a client prove for liability under common law?

  Duty owed, breach, causal connection, damage
• What are the auditor's defenses against liability claims?

  No duty owed, client negligence, work met standards
• What must a third party prove to hold an auditor liable?

  Duty, breach, causation, actual loss
• What are the four legal principles for third parties regarding auditor liability?

  Privity, near privity, foreseen, reasonably foreseeable
• What was the outcome of Ultramares v Touche (1931)?

  Auditors not liable due to lack of privity
• What is the significance of the Ultramares case?

  Established precedent for auditor liability to third parties
• What are the components of the audit expectation gap?

  • Unrealistic expectations from users
  • Performance gap by auditors
  • Standards not meeting user needs
• What are the duties of auditors under statutory law?

  • Report violations of law
  • Express opinions on financial statements
  • Comply with various statutes like FSA, SCA, AMLA
• What are the types of negligence relevant to auditors?

  • Ordinary negligence: Lack of due care
  • Gross negligence: Extreme departure from standards
• What are the auditor's obligations under common law?

  • Duty of care to clients
  • Liability for breach of contract, negligence, and fraud
• What are the auditor's defenses against liability claims from third parties?

  • No duty owed to third party
  • Third party's own negligence
  • Auditor's work met professional standards
• What is the significance of the Candler v Crane case?

  • Established principles for auditor liability to third parties
  • Clarified auditor's duty of care
• What are reasonably foreseeable third parties?

  Third parties whose reliance is foreseeable
• What was the first landmark case regarding auditor liability?

  Ultramares v Touche (1931)
• What was the fact of the Ultramares case?

  Ultramares sought a loan based on audited statements
• What was the judgment in the Ultramares case?

  Auditors owed no duty of care to Ultramares
• Why did the court rule against Ultramares in the Ultramares case?

  Ultramares was not a primary beneficiary
• What was the fact of the Candler case?

  1. Candler invested based on negligent accounts
• What was the judgment in the Candler case?

  Auditors owed no duty of care to Candler