Does the Law of Negligence Apply to the Company Auditor?

Law of Negligence is applicable to certain situations where the failure occurs while performing duties. This law applies to professionals especially when due care is not taken while serving their clients. In such cases, negligence of professionals cause damage to the parties that obtain their services. 

The damage is resulted from their carelessness but not with any intention to do harm.  Courts consider these cases under tort law where the damage is caused by one party to another one. In the present era, there has been a significant increase in the negligent claims. The reasons for this are the removal of the restrictions that were imposed in earlier cases and the increase in recoveries for the damages caused by the defendants especially where the economic loss is seen.  

Whether the law of negligence applies to the Company Auditor

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Duty of Accountants and objective of the Audit

Usually accountants perform various duties to their clients; among them auditing is one. Audit refers to the scrutiny of company’s financial statements. The main reason behind audit is to check whether the financial statements of the company are prepared fairly and complaint with the GAAP (Generally Accepted Accounting Principles). Then the auditors have to give their opinions based on the fairness of financial statements. The auditors in their audit have to detect any frauds or misrepresentation made by the company and management. If the auditor certifies the accounts of the company that means they are signifying the true and fair view of the company’s financial position.

But, sometimes they fail to detect the errors and frauds which violates the main purpose of the audit that is the financial statements should depict the true and fair view. The misrepresentation of financial statements is done by negligence which leads to claims under law of negligence. But, accountants claim that it is the company that liable for the misrepresentation of the financial statements, but not the accountants who prepare these statements. It depends on the situations.

When considering the prior case studies, and various approaches, the tort of negligence would be applicable in certain circumstances especially for the occurrence of financial loss resulted by the negligent statement of the defendant. If there is a proximity of relationship between both the parties i.e. plaintiff and defendant and the economic loss is resulted from the negligence of the defendant and if the plaintiff is able to prove the loss is foreseeable then, the defendant is liable for the economic loss.