Auditor Liability and Duty of Care

The assignment discusses the role of auditors in organizations with increasing complexity. It examines auditor liability, duty of care, and the consequences of conveying intent to auditors. The case study of Caparo Industries Plc v Fidelity Plc is cited as an example. The importance of written evidence and communication with auditors are highlighted. The report concludes that auditors have a significant role in protecting stakeholder interests.

Auditing and Assurance Service

Contents
Introduction......................................................................................................................................3
Answer 1..........................................................................................................................................3
a. Comparison of GHG Emission Disclosures in Woodside Petroleum Limited (Woodside) and
AGL Energy Limited (AGL) Annual Sustainability Reports......................................................3
b.NGER Auditing Requirements.................................................................................................4
c. Woodside & AGL Sustainability Report Assurance................................................................5
d. Audit Assertions in GHG Reporting........................................................................................5
Answer 2..........................................................................................................................................6
a. Case for Warehousing Ltd to Sue the Auditors for Negligence through the application of
case law and precedents...............................................................................................................6
b. Justification of Successful Legal Action taken by Warehousing Ltd through Relevant Cases
and Precedents..............................................................................................................................7
c. Impact of Conveying to Auditors in Written by Warehousing Ltd about their decision to buy
CFW.............................................................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

Introduction
There is increasing pressure on the business organizations nowadays for promoting
transparency and accountability in their operational activities. The businesses need to comply
with different type of rules and regulations for meeting the various needs of the stakeholders. As
such, the role of auditors is also becoming increasingly complex as they have to properly check
the financial accounts of an organization for maintaining the transparency in its operations. The
role of auditors is very important to maintain internal control within an organization. The
business organizations are therefore emphasizing to audit their sustainability reports as well as in
addition to their annually prepared financial statements (Tritschler, 2013). As such, the present
report analyses the two different scenarios’ related to the expanding role of auditors in present
business environment. The first scenario relates to examining the green house gas emissions
(GHG) report auditing undertone voluntarily by some Australian organization while second one
relates to describing the important of auditors in developing accurate financial statements.
Answer 1
a. Comparison of GHG Emission Disclosures in Woodside Petroleum Limited
(Woodside) and AGL Energy Limited (AGL) Annual Sustainability Reports
The large number of business entities around the world are developing and disclosing the
GHG reports as it has been regarded mandatory by some countries around the world such as the
US, the UK, Canada, Japan and the Australia. The development of GHG reports in Australia is
governed by the National Greenhouse and Energy Reporting Act 2007 (NGER) and is regulated
by Clean Energy Regulator. However, there is no mandatory requirement for the business
organization in Australia to audit their GHG reports but some organizations are seeking to audit
their sustainability reports for increasing transparency within their business activities. As such,
Woodside Petroleum Limited (Woodside) and AGL energy Limited (AGL) are the business
organizations in Australia engaged in auditing their sustainability reports as per the NGER Act.
Woodside has adequately disclosed information regarding the emission of greenhouse
gases in Australia in its sustainability report. The company has properly discussed about the
impacts of its business operations on the climatic changes and has assessed both the risk and

opportunities due to these changes. The company is involved in the exploration and production
of oil and gas products. Therefore, it is extremely essential for the company to adopt sustainable
business practices for protecting environment from the negative impact of greenhouse gases. The
company’s different approaches for reducing the emission of greenhouse gases have been
disclosed effectively in the report. For example, it supports global carbon pricing and also
pursues energy efficiency programs to minimize its emission of greenhouse gases. It has also
disclosed the amount of greenhouse gas emissions in the past 5 years in the data table. The
company’s efforts to incorporate the use of natural gas for production of energy have also been
discussed in the sustainability report with the aim of reducing the emission of greenhouse gases.
In addition to this, the voluntary disclosures regarding the safety framework adopted by the
company for reducing the impact of flammable hydrocarbons on the business operations is also
being disclosed in the report (Woodside Petroleum Ltd: Sustainable Development Report, 2016).
On the other hand, the sustainability report of AGL Energy Limited has also provided
sufficient disclosures regarding the efforts taken by the company for reducing the emission of
greenhouse gases. The Greenhouse Gas Policy of the company is specifically meant for reducing
the emission of greenhouse gases annually by about 30% till the end of the year 2030. Also, it
has disclosed the overall account of greenhouse gas emissions from its business in the data
centre. The significant increase in the emission of greenhouse gases in the year 2016 as
compared to the year 2015 has also been sufficiently explained in the report. Thus, as per the
NGER Act requirements, both the companies have effectively provided the information related
to the annual scope 1 and scope 2 greenhouse gas emissions and the net energy consumption of
the overall business activities (Agl Sustainability Report, 2016).
b.NGER Auditing Requirements
The NGER Act has mandated business organizations in Australia for disclosing the
information relating to greenhouse gas emissions, energy consumption and production to the
Clean Energy Regulator. The Act requires Clean Energy Regulators to develop the register of
auditors for easy selection and appointment of a suitable auditor. As per the NGER, there should
be a common framework adopted by the business entities in Australia for the emission of
greenhouse gases. NGER has developed Energy Reporting Audit Framework for providing the

information relating to legislative framework for greenhouse and energy audits (Bellassen &
Stephan, 2015).
c. Woodside & AGL Sustainability Report Assurance
Woodside sustainability performance is audited by the Ernst and Young Services Pty
Limited who has provided independent reasonable and limited assurance report to the directors
of the company after reviewing its sustainability development report. As per the auditor, the
subject matter of engagement and the assurance standards used are the complete content of the
activities of Woodside and the Global Reporting Initiatives G4 disclosures. The auditors has
stated that overall information disclosed by the company in its sustainability report in relation to
the material aspects of transparency, regulatory compliance, climate change, incident prevention
and response and health and safety performance. As per the views of auditor, there is inherent
risk associated with the assurance over non-financial information disclosed by the company in its
sustainability report (Woodside Petroleum Ltd: Sustainable Development Report, 2016).
On the other hand, the sustainability report of the AGL Energy Limited is being audited
by Deloitte. The assurance standard used by the auditor for reviewing the sustainability
performance of the company was AA1000 principles, selected sustainability indicators and self-
declaration of the company that the report has been developed as per the GRI GR guidelines. As
per the views of auditor, the company has effectively adopted the use of AA 1000 principles of
inclusivity, materiality and responsiveness in carrying out its different operational activities as
depicted in its stakeholder engagement section. As such, the content of the annual sustainability
report is relevant as per the overall strategy of company and the stakeholder expectations (Agl
Sustainability Report, 2016).
d. Audit Assertions in GHG Reporting
The main audit assertion in GHG reporting is obtaining reasonable assurance that the
information disclosed in the sustainability report is free from material misstatement so that
auditor is able to provide accurate opinion on the sustainability report. As such, the auditor
assumes that information provided in the scope 1 and scope 2 of greenhouse gas emissions is
accurate and reliable. The assurance procedures used by the auditor in auditing are reliable and
management is responsible for collecting, preparation and presentation of subject matter as per

the adequate records for successful auditing of the company (International Standard on
Assurance Engagements, 2012).

Answer 2
a. Case for Warehousing Ltd to Sue the Auditors for Negligence through the
application of case law and precedents
The present case reflects the issues that can arise due to auditor’s negligence in reviewing
the financial position of a business entity properly. Warehousing Ltd is planning to sue the
auditor’s of CFW as they have overvalued the inventory in the audited balance sheet during the
time of its takeover by the company. It has been identified by the Warehousing Ltd that after two
years of takeover that the inventory was over valued during the time of the audit. The following
matter was brought before the court as evidence by Warehousing Ltd against the CFW’s
auditors. The evidence includes that the auditors have not attended all stock-takes the end of the
year and also it has been recognized that the inventory is overvalued by 35% in its Sydney based
operations. Also, 50% of the inventory of the company is held at its Bathurst facility and there is
no existence of this inventory. The auditing has been done in extreme pressure put by the CFW
management as accepted by its auditors.
In this context, as per the contract law and law of tort there is a liability for auditor
towards its third party and business clients. As per the contract law, the auditor’s can be sued by
the shareholders if there is breach of any contractual obligations by them towards the company.
For example, in the case of PwC’s V Tyco, PwC’s has to pay $229m to the shareholders of its
client Tyco in the year 2007. However, in the present case auditors cannot be used for negligence
by the CFW shareholders as the management has themselves put pressure on them to complete
the audit as early as possible (Bar & Drobnig, 2004). In addition to this, the law of tort in the
auditing profession states that auditors can be sued for negligence if there is breach of duty of
care towards a third party only under the following circumstances:
 The loss suffered is foreseeable consequence of the conduct of defendant
 There exists a close relationship between the pursuer and defendant
The auditors can be sued for negligence by Warehousing Ltd on the basis of law of tort. This
is because as per the law, there is breach of duty of care by the auditors that has resulted in
causing the loss to the company. As per the law specification, if the loss suffered by a third party

is due to the foreseeable consequence of the defendant conduct then the auditors can be sued for
the breach of duty. The auditors must have overseen during the time of auditing that the financial
statements verified by them falsely can cause loss to a third party in the future. Warehousing Ltd
can use the law of tort as the relevant case law for the negligence undertaken by auditors towards
their role and responsibility (Auditor Liability, 2018).
b. Justification of Successful Legal Action taken by Warehousing Ltd through
Relevant Cases and Precedents
Warehousing Ltd need to examine some past relevant cases for examining whether the
legal action taken by them will prove to be successful or not. In this context, the case of Caparo
Industries Plc V Fidelity Plc. can be cited as an example. Caparo was pursued by the firm
Touche Ross and has made the purchase of shares of the company Fidelity plc. Caparo has
alleged that the decisions were taken by the company on the basis of false accounts and it
claimed that Touche Ross, auditors of Fidelity has a duty of care towards them. However, the
claim was proved to be unsuccessful by the House of Lords on the basis that accounts were
prepared for the existing shareholders and there is no reasonable knowledge of the purpose that
the accounts will be made available to Caparo by the auditor. As such, Warehousing Ltd before
suing the auditors for negligence that all the conditions of the contract law and law of torts are
fulfilled that proves that there is breach of duty of care by the auditor. In the present case, Caparo
was unable to provide sufficient evidence against Fidelity Plc auditors for providing false
accounts (Auditor Liability, 2018). However, Warehousing Ltd should have written evidence of
the fact that the loss suffered by the company is due to foreseeable consequence of the defendant
conduct. This will lead to establishing breach of duty of care by the auditor in the present case
and then only exists a large possibility of the claim being successfully proved in the court.
c. Impact of Conveying to Auditors in Written by Warehousing Ltd about their
decision to buy CFW
There would be large possibility of the successful legal action taken by Warehousing Ltd
against the CFW auditors if the auditors were aware of the intent of CFW for completing the
audit quickly based on the management valuation. The law of tort has stated that there is breach
of care on the part of auditor towards the third party only when the auditor is well aware of the
fact that there is close relation between the defendant and the pursuer. The written
communication would have brought into knowledge of the auditor that CFW is pressurizing

them to complete the audit quickly due to its takeover by Warehousing Ltd. As such, then breach
of duty by the auditor can be established by Warehousing Ltd in the court and they can be sued
for negligence (Tritschler, 2013).
Conclusion
Thus, it can be stated from the overall discussion held in the report that auditor’s role is
becoming increasingly important in organizations with the increasing complexity in the business
environment. They should carry out their responsibility ethically for protecting the interests of all
the stakeholders.

References
Agl Sustainability Report. (2016). Retrieved 31 March, 2018, from http://agl2016.sustainability-
report.com.au/system/files_force/downloads/agl_csr_2016.pdf
Auditor Liability. (2018). Retrieved 31 March, 2018, from
http://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-
resources/p7/technical-articles/auditor-liability.html
Bar, C. & Drobnig, U. (2004). The Interaction of Contract Law and Tort and Property Law in
Europe: A Comparative Study. sellier. european law publ.
Bellassen, V. & Stephan, N. (2015). Accounting for Carbon. Cambridge University Press.
International Standard on Assurance Engagements. (2012). Retrieved 31 March, 2018, from
https://www.aicpa.org/Research/Standards/AuditAttest/ASB/Documents/Mtg/1207/ISAE
%203410-Final%206-6-12.pdf
Tritschler, J. (2013). Audit Quality: Association between published reporting errors and audit
firm characteristics. Springer Science & Business Media.
Woodside Petroleum Ltd. (2016). Sustainable Development Report. Retrieved 31 March, 2018,
from http://www.woodside.com.au/Investors-Media/announcements/Documents/
16.03.2017%202016%20Sustainable%20Development%20Report.pdf