Abstract

When someone wants information about a company the primary place to go is the annual report. This contains a wealth of data (both financial and non-financial) regarding the performance of a business. One guarantee of accuracy is the statutory audit that must be performed. However, those seeking information may be disappointed. In some cases this is due to a misunderstanding of the nature of audit, which is based on samples and materiality, meaning that an audit does not provide a check on every number in the accounts, and is not a perfect policeman against fraud. In other cases this is due to a failure of auditors to act in accordance with accepted practice, but in such cases tort law may not provide the disappointed party with a remedy. The liability of auditors is a constant battleground. Whilst liability to third parties is relatively settled, both by the decision of the House of Lords in Caparo v Dickman and the liberal use of exclusion notices on the face of the audit report, liability to the audited company and its shareholders is more disputed, particularly in cases of fraud by directing minds. The decision in Stone & Rolls v Moore Stephens provides an unclear basis for refusing compensation to a company damaged by fraud perpetrated by its director, and similar issues have recently arisen in both the UK (Jetivia v Bilta) and Canada (Livent Inc v Deloitte & Touche). Drawing on an examination of case law, accountancy practice and financial statements, this paper seeks to reanalyse the auditors’ duty of care, particularly in fraud cases, in the light of the challenges faced by auditors, financial statement users and the courts.