Role of Auditors and Legal Liability in Audit Assurance and Compliance

This presentation provides an analysis of the role of auditors and their legal liability in the field of audit assurance and compliance. It discusses the increase in litigations and liabilities faced by auditors and the impact on the industry. The presentation also explores a specific case involving an auditing company and the Royal Bank of Scotland, highlighting the issues raised and the recommendations for auditing strategy and program.

AUDIT ASSURANCE AND COMPLIANCE
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Executive summary
 The paper focuses on providing an analysis of the role of auditors and their
legal liability.
 Over the years, the audit profession has been facing an increase in litigations
and liabilities; this is highly costing the occupation, over billions of pounds.
 There have been several cases in court were auditor firms, had been
penalized for their negligence, fraud, misrepresentation of information,
especially those involving third parties.
 This has reduced competition among the auditing firms because small firms
will be shunning large listed companies because of the potential risks and
costs involved in auditing them.
 Within the auditing profession, auditors can make all the endeavors to reduce
the litigation and penalty rate since that for so long has affected the industry.

Introduction
 The critical responsibility performed by the auditor is to offer reasonable
assurance to financial statement users that information presented on that
statement is free form errors and right.
 The case under study is from the United Kingdom. Auditors within society
are responsible for providing assurance services.
 Therefore, investors within the public view them as the guarantor of
investment corporations (Marianne 2009).
 Auditors should always be alert in ways they are offering their services
(Samsonova-Taddei & Siddiqui 2016).

Auditing and litigation
 Auditing companies face different types of liabilities; some of these
liabilities are civil and criminal offenses.
 Criminal liability occurs to auditors when they have potentially breached
the imposed law by the government, and this means that criminal acts
offer a relationship between the state and the auditing entities
(Richardson & Eberlein 2011).
 The civil laws in auditing deal with differences or misunderstandings
between organizations and individuals (Marianne 2019).
 Auditor, like any other individuals, is limited by laws and rules within the
countries they are operating in.
 Under criminal law liability, auditors could be prosecuted with acts related
to insider trading and fraud.

Description of Key events and factual issues
(Royal Bank of Scotland (RBS) Vs.
Bannerman Johnston MacLay and others)
 The case involved two parties where one was the defendant, and the other was the plaintiff, there was
the third-party who was the center of discussion of the case.
 The plaintiff in the law case refers to an individual or party which is accusing the other of breaking the
law hence affecting him; the plaintiff relates to an individual who drags the other to court.
 The defendant refers to an individual who is taken to court for either breaking a civil law or criminal law.
 The plaintiff always accuses the defendant from doing wrong. Within this case, the defendant was
Bannerman Johnstone Maclay and others(Cunningham 2011).
 The defendant was an auditing company which carried out all the auditing services for the plaintiff in
the earlier years before an issue was taken to court.
 The plaintiff of the case was the Royal Bank of Scotland.
 The defendant of the case was dragged to court because in the years before took audits concerning the
plaintiff causing issues in the year of 1998, in that year the company lost money while the third-party
company received an amount of money of around 13 million pounds.
 Royal Bank of Scotland claimed a refund of 13 million pounds from the auditor's company, there
complain is that the accounts or audits which were made in the previous years were misstating the right
financial standings of the company and the same time the auditing company was negligent in detecting
it (Gillis et al. 2014).

The parties which were responsible and
reasons why
 There are two parties involved within the case, and the other is a third-party, APC limited which
the third party during the auditing went into receivership while at the same time Royal Bank of
Scotland was losing its money.
 The Royal Bank of Scotland decided to recover its losses through suing defendants who were
the auditing company to the court making claims that the company was too negligent of its
services as well as breached the duty of care it was owing to the Bank.
 Bannerman, the defendant in court, argued that it was not right if the stated allegation is said
to be accurate, in no manner did they owe the Royal Bank of Scotland a duty of care.
 The pursuers were pleading for payments of four separate sums of money to cover their losses.
 These sums of money were 12,016,000 pounds as the first sum, the second sum was 7,116,000
pounds, the third sum was 1,947,000 pounds, and the fourth sum was 12,016,000 pounds.
 Both parties were heard in the court, and the court held in favor of the plaintiff or the Royal
Bank of Scotland.
 The case was in support of the bank because the court stated that the auditors had prior
knowledge of how the bank would use the auditing information to third parties and it depended
so much on the auditing information to carry out its services.

The relevant issues raised in Accounting
and Auditing by the case
 The question which was built after the occurrence of the case was regarding the auditor's duty of care to the third
parties.
 Handling the auditor's third-party duty of care specifically looked at the different scenarios of how disclaimers would
be considered appropriate (Chandler 2017).
 The case raised a lot of question to the accounting fraternity whether accountants or auditors might protect
themselves from the possible liabilities and litigations through using disclaimers, which are standard in their audit
reports made as a company.
 There was a change in the Companies Act laws to carter for the third party when auditing is done for the company to
protect the auditors or accountants.
 The council and technical committee of ACCA monitored developments basing on the ruling of the Bannerman case.
 Basing on the matter, ACCA council suggested that the only way accountants can restrict themselves from any form
of liability is through carrying out their professional auditing works regarding the auditing standards (Öhman &
Wallerstedt 2012).
 They farther suggested that when there is proper conduction of auditing, there is no need for attaching the work to
disclaimers to protect themselves.
 The ACCA issued a technical fact sheet on CCAB behalf explaining lenders who are third parties and auditors (Carter
& Spence 2014).
 One of the parts in the fact sheet was that auditors or accountants who are aware and in receipt of the request to
give acknowledgment of the responsibilities and roles to client lenders must not go unanswered.

The root cause of the issues
 The Royal Bank of Scotland claimed that there was a fraud which was
created by one of the defender's employees seconded to act as the
financial controller for the APC a third party, this allegation was dismissed
in court.
 The pursuer also alleged the defendant as Bannerman auditors and owed
them a duty of care; the pursuers claim that they made a loss as a result
of the breach of the task.
 Therefore, in the case of the Royal Bank of Scotland as the plaintiff Vs
Bannerman Johnstone Maclay and others, was not a cause of fraud, market
pressure, or organizational culture but instead was as a cause of
misrepresentations of the information provided by the auditors to the bank

Mistakes and misrepresentations which were carried
out by defendants during the session of the court
thus contributing to awarding of the damages
 When the defendants were presenting themselves, few mistakes were
made.
 The pursuers claim that there were fraud and negligence during the
occurrence of the audit.
 In their defense, the defenders stated that the pursuers did not inform
them about the intentions of the review.
 They barely knew about the existence of a duty of care which the
defenders owed the pursuers concerning the audit of APC accounts.
 Following the defense provided by the defendant, there were no
mistakes conducted.
 The court followed the first decisions which were made in the first
hearing.

Recommendations to the Auditing
Strategy and Auditing program
 As a result of judgment which was made during the Bannerman case, Bannerman paragraph or Bannerman clause was
established within the Companies Act of 2006. This is very helpful in protecting the auditing firms or companies from
unnecessary litigations from client companies.
 From the above case, auditing companies learned the following: During the time of auditing of such institutions, the following
should be put into consideration.
 There should always be critical identification of the third parties before carrying out any auditing. Management teams should
continually fully evaluate and monitor third parties which are connected to the institution they are auditing (Huepkes 2010).
 Third-parties are always associated with high risks, and these risks are still affecting the auditing teams. Therefore, a better
third-party strategy should access all the risks associated with auditing companies related to third parties.
 There is also a need for assessing the third party risk management program; there should be a determination whether the
company's third-party program is associated with diligence processes (Gomes et al. 2011).
 To void liability, auditors have to understand that there are potential areas of professional auditing where there is no
possibility for limiting or excluding a given liability for example when one fails to make correct auditing when acting under the
Companies Act 1985 as an auditor.
 Auditors also understand that there are areas within professional work where even if an exclusion or limitation is included as
a liability (International Ethics Standards Board for Accountants (IESBA) 2014), its effectiveness only depends on the court's
view or ruling.
 He only understands this understanding of the different terms and possible areas where an auditor may be leveraged to
liability because of the rules governing auditing, therefore professional verification is both helpful and advantageous to
auditors such that they offer quality work and to the clients such that they are adequately protected from lazy and unfaithful
auditors (Clements et al. 2009).

Conclusion
 Litigation is very disadvantageous to auditing firms.
 it is stated that over millions to billions of liabilities have been
passed onto the big four auditing companies in two decades.
 Following the identified case within the report, it is noted that
litigation is not only disadvantageous but also advantageous because
it will educate firms on how to avoid negligence, fraud, and
misrepresentation of information.