Section 327 of the Companies Act, 1963 (Act 179) of Ghana titled ‘Power to Grant Relief’ stated categorically that:
- “If in any proceedings against a member, officer or auditor of a company for any default or breach of duty under any section of this Code or against any trustee for debenture holders in respect of any breach of duty or trust it appears to the court hearing the case that that member, officer, auditor or trustee is or may be liable but that he has acted honestly and reasonably and that, having regard to all the circumstances of the case, he ought fairly to be excused, the court may relieve him in whole or in part from his liability on such terms as the court may think fit.
- Where any such member, officer, auditor or trustee has reason to apprehend that any claim may be made against him in respect of any breach of duty or trust, he may apply to the Court for relief; and the Court on any such application shall have the same power to relieve him as under this section it would have had if it had been a court before which proceedings against that person for breach of duty or trust had been brought.”
From this section of the Act, it is evident that auditor(s) may have performed his/her duties with the highest level of professionalism, exercised all necessary due diligence, abided by all codes of ethics, statutes and applicable standards, yet may not be able to detect or foresee a firm’s disaster because audit is limited in scope.
Discussions on ‘Auditor Liability’ was not considered necessary in Ghana a couple of years back, but today it is something that those in the Audit and Assurance profession should take a second look at. Seven (7) banks are down within a year, and the general public is of the view that the external auditors of those banks should have uncovered the cause and prevented their fall of long ago. While we wait for the outcome of investigations by the regulator of the Accounting and Audit profession, Institute of Chartered Accountants, Ghana (ICAG), to uncover auditors’ involvement or otherwise in the collapse of the seven banks, there is need to light the fire for discussion of Auditor Liability in Ghana, because we are in an era whern the statements “…in our opinion, the financial statements give a true and fair view of the financial position of…” and “…our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error…” in an auditor’s report would not be enough to protect auditors against liabilities from interested parties’ legal actions.
The Global World has accepted Auditing as the means by which shareholders (owners) of an organisation and other stakeholders can keep an eagle eye on management’s activities; the Audit and Assurance profession has therefore come into the spotlight over the years. However, due to misconceptions surrounding the profession, most stakeholders, if not all, see auditors as soothsayers who are able to give absolute assurance. With this mind-set, should anything go wrong after an audit it is expected to hold the auditor(s) in charge responsible. From this and many others like threats imposed by technological developments, implementation of just-in-time systems etc., the need to limit auditor liability developed.
Auditor liability in general means clients and or third parties whom auditors owed duty of care and/or due diligence suffer financial loss as a result of professional negligence, criminal act, breaches of trust or contract, statute provisions etc. on the part of the auditors, their employees or associates. The auditor liability to client is direct, and basically it means clients suffering financial loss as a result of an auditor expressing inappropriate opinion.
Right from the onset there were not any outlined liabilities of an auditor until clients and third parties started bringing lawsuits against their auditors. The auditor liability developed case after case, with historical cases setting the pace. Notable landmark cases were Caparo Industries plc. v Dickman ; 2 AC 605, Hedley Byrne & Co. Ltd. v Heller & Partners Ltd. ; AC 465, Lightman J. in the case of Anthony v Wright  BCC 768.
In Ghana and almost all other countries, the Companies Act, Sale of Goods Act etc. have sections that apply directly or indirectly to work of the auditor. Notwithstanding, these Acts apply to or cover only small areas of the duties and liabilities of the auditing profession. There is therefore a need for Parliament to pass The Chartered Accountants bill into an Act in place of the Chartered Accountants Act, 1963 (Act 170), to deal specifically with the Accounting and Auditing professional and any professional misconduct on the part of accountants as stated in the Third Schedule of the bill.
Most entities also have unlimited lists of stakeholders, and once its established that the auditor(s) was the cause of financial loss suffered by these third parties in any case due to their reliance on the auditor’s report, the liability of the auditor(s) may hardly be quantified. This can cause the collapse of high-profile audit firms like it did to Enron and its auditor Arthur Andersen.
ACCA Global (2015) stated claim settlements for the Big Four audit firms were in billions of dollars over the past two decades alone’ and should Audit Firms begin to collapse in addition to Banks, this would cause more harm than good to the Ghanaian Economy. There have been many reforms for the audit profession globally over the years, but passing the bill into an Act will help the country (Ghana), to get specific reforms which will help grow the local audit firms, prevent the fall of big firms, and strengthen the accounting profession in Ghana.
Audit came from the Latin word audire, which means to hear. As stated by (Byrnes et al 2012), wide adoption of auditing was as a result of industrial revolution and growth, attempts to limit cost, manage production and other operational activities. The need for fraud detections and financial accountability became necessary, and financial reports were the main source of investors’ information of listed firms. (Chandler, 1977).
The need for structures to refine and define audit became necessary, and for these reasons International Standards on Auditing (ISAs), Code of Ethics, etc. were developed by the International Federation of Accountants (IFAC). IFAC adopted a definition for auditing as having the objective to enable auditors express an opinion on whether the financial statements were prepared, in all material respects, in accordance with identified financial reporting frameworks.
Once appointed as an auditor of a firm, a contractual relationship is formed between the auditor and the client. Members of the audit profession are expected by clients to possess the requisite skills and knowledge before engaging themselves with work contracted. By issuing a letter of engagement to clients spelling out the scope of the work before commencement of assurance engagements, auditors are in one way or another stating their duties and what is expected of them for which they can be held liable – once accepted by clients, liabilities of auditors outside the scope may be avoided.
Notwithstanding, agreement with clients to limit auditor liability may not be accepted by law: section 136 of the Companies Act 1963 (Act 179) of Ghana nullifies companies’ articles provisions, engagement agreements aiming at releasing auditors from or protecting them against liabilities caused by negligence, default, etc. Therefore, auditors are also liable in tort and not only in agreements. Third-parties liabilities occur when the auditor knows or should know third-parties would reasonably rely upon his/her report and loss may be suffered due to his/her negligence.
The Law Society v KPMG Peat Marwick (2000) 4All ER540 decision confirmed that the auditor has a duty of care to third parties where the criteria above are satisfied. The case of Royal Bank of Scotland v Bannerman Johnstone Maclay (Scottish Court) also affirmed auditor due diligence toward third parties even if actual knowledge is not known, but constructive knowledge exists of parties’ reliance on report (ACCA, 2009).
Investors rely on auditors to exercise their stewardship function, but statutory audit may sometimes not be able to detect and report abuse and misuse of the stewardship function assigned to management. It must be noted that early-day audits were more of confirming accounts correctness and detecting fraud and misstatements, but the emphasis has drifted over the years to verification of financial accounts’ truthfulness.
It is therefore clear that with one audit in the past, investors could get both assurance audit (usual) and forensic (fraud) audit. Not that assurance audit ignores fraud, but that is not the main aim anymore. Therefore, while investors were spending less to get more services (both assurance and forensic audits), they have to spend more to get the same services these days because assurance has been separated from forensic audit. Corporate entities should consider engaging auditors for forensic audit periodically, even when there are no red-flags.
Statutory bodies should extend filing dates for corporate entities to avoid rushing through the audit process.
Every firm, if possible backed by law, should have an internal audit unit to help uncover and address the going concern deficiencies statutory auditors may not detect due to limited scope and/or time. Shareholders should be provided with management reports upon request, stating control deficiencies, management response(s) to them and auditor’s recommendation(s) to increase/maintain the level of assurance.
Making available to shareholders management reports from auditors is a way of assuring investor groups that nothing fishy is going on between auditors and management. Shareholders can make informed decisions based on management letters other than the audit report, which will limit their loss to be suffered should it occur. Management letters contain the deficiencies in the firm, and it is only fair that investors (owners) are provided with them when requested.
The writer is a member of The Institute of Chartered Accountants, Ghana (ICAG) and The Institute of Chartered Economists, Ghana (ICEG). The views expressed in this article are his personal opinions and do not reflect those of The Two Institutes stated above in anyway.
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ACCA, 2015, Auditor Liability: ‘fair and reasonable’ punishment?
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Chandler, A. D., Jr. 197, The Visible Hand: The Managerial Revolution in American Business. Cambridge, Massachusetts: Harvard University Press.
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www.accaglobal.com – Auditor Liability: ‘fair and reasonable’ punishment
www.academia.edu – Auditor Liability: Liability Limitation Agreements
www.chicagobooth.edu – What would happen if the Big Four became the Big Three