ACCA AAA · Chapter 7
Auditors’ liability
Your chapter at a glance. Open any section, or keep the whole map in view.
Liability test duty + breach + caused loss
Statute
- May impose duties or offences in particular roles
- Uncommon in the context of audit liability
Contract
- Engagement letter sets the auditor’s and client’s obligations
- Failure to perform with due care and skill may create liability
Tort of negligence
- A third party may claim for loss caused by auditor negligence
- This is the principal difficulty for third-party claims
Keep the routes separate
- Identify the claimant and legal basis of the claim
- Scope of duty depends on purpose and relationship
Duty of care
- Auditor-client proximity is normally presumed
- A third-party duty needs separate assessment
Breach
- Show that the auditor failed to meet the required standard
- Consider ISAs, engagement terms and professional care
Loss and causation
- Show financial loss caused by that breach
- Negligent work alone does not establish liability
Exam sequence
- Address duty, breach, loss and causation separately
Three-fold test
- Foreseeable reliance by this claimant for this purpose
- Sufficient proximity between auditor and claimant
- Fair, just and reasonable to impose liability
Caparo v Dickman
- No common law duty to individual investors buying shares
- Audit addresses existing shareholders as a class
RBS v Bannerman
- Auditor knew bank relied on statements for lending
- Absence of disclaimer helped establish duty to the bank
Apply the facts
- Do not assume every user is owed a duty of care
Professional care
- Apply ISAs, ethics, engagement terms and quality management
- Staff competence, supervision and review support due care
Disclaimers
- May help limit a third-party duty but are not absolute
Other measures
- PII covers negligence claims; FGI covers staff dishonesty
- LLP limits exposure to others’ acts, not one’s own negligence
Client limitation agreements
- Fair and reasonable, current year, shareholder approved
- Cap claims by client, not third-party claims
Proportional liability
- Not the general UK basis of auditor liability
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