Auditors and Legal Liability
VerifiedAdded on 2023/01/19
|18
|4856
|70
AI Summary
This report evaluates the case of Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay (Bannerman) (2002) and discusses the legal liability of auditors. It highlights the issues in accounting and auditing, the root causes of these issues, and the mistakes made by the defendants. Recommendations for improving audit strategies are also provided.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Running head: AUDITORS AND LEGAL LIABILITY
Auditors and Legal Liability
Name of the Student:
Name of the University:
Author’s Note:
Course ID:
Auditors and Legal Liability
Name of the Student:
Name of the University:
Author’s Note:
Course ID:
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
1AUDITORS AND LEGAL LIABILITY
Executive Summary:
The current report would evaluate the instance of “Royal Bank of Scotland (RBS) v Bannerman
Johnstone MacLay (Bannerman) (2002)”, in which the actuary was believed to be responsible
for professional carelessness and as a result, the firm has been sued for conducting such act. It
has been found that according to the defenders of the auditors of RBS, there was absence of
relevant statement of the prevalence of "duty to protect" that the "protectors" were accountable to
the pursuers for auditing the accounts of APC. However, these claims do not hold true because
like organisations or individuals, the actuaries are obligated by rules in the nations where these
people practice. Therefore, in accordance with the existing criminal law, there could be
prosecution for the auditors like insider trading and fraud. Therefore, the auditors have to
improve their skills as well as potential liabilities so that the clients could rely more on their
reports as well as examined "account statements", that are proper, unbiased and pertinent to the
decision-makers.
Executive Summary:
The current report would evaluate the instance of “Royal Bank of Scotland (RBS) v Bannerman
Johnstone MacLay (Bannerman) (2002)”, in which the actuary was believed to be responsible
for professional carelessness and as a result, the firm has been sued for conducting such act. It
has been found that according to the defenders of the auditors of RBS, there was absence of
relevant statement of the prevalence of "duty to protect" that the "protectors" were accountable to
the pursuers for auditing the accounts of APC. However, these claims do not hold true because
like organisations or individuals, the actuaries are obligated by rules in the nations where these
people practice. Therefore, in accordance with the existing criminal law, there could be
prosecution for the auditors like insider trading and fraud. Therefore, the auditors have to
improve their skills as well as potential liabilities so that the clients could rely more on their
reports as well as examined "account statements", that are proper, unbiased and pertinent to the
decision-makers.
2AUDITORS AND LEGAL LIABILITY
Table of Contents
1. Introduction:................................................................................................................................3
2. Brief description of key events and factual issues behind the case:............................................3
3. Responsible parties of the case and evaluation of the appropriateness of damages or penalties
imposed:...........................................................................................................................................4
4. Investigation and explanation of the relevant issues in accounting and auditing highlighted in
the case:...........................................................................................................................................6
5. Root-cause of the identified issues:.............................................................................................6
6. Problems, mistakes or misrepresentations made by the defendants:...........................................8
7. Recommendations:....................................................................................................................10
7.1 Audit strategy:.....................................................................................................................10
7.2 Audit program:.....................................................................................................................11
7.3 Other effective measures:....................................................................................................12
8. Conclusion:................................................................................................................................13
References:....................................................................................................................................15
Table of Contents
1. Introduction:................................................................................................................................3
2. Brief description of key events and factual issues behind the case:............................................3
3. Responsible parties of the case and evaluation of the appropriateness of damages or penalties
imposed:...........................................................................................................................................4
4. Investigation and explanation of the relevant issues in accounting and auditing highlighted in
the case:...........................................................................................................................................6
5. Root-cause of the identified issues:.............................................................................................6
6. Problems, mistakes or misrepresentations made by the defendants:...........................................8
7. Recommendations:....................................................................................................................10
7.1 Audit strategy:.....................................................................................................................10
7.2 Audit program:.....................................................................................................................11
7.3 Other effective measures:....................................................................................................12
8. Conclusion:................................................................................................................................13
References:....................................................................................................................................15
3AUDITORS AND LEGAL LIABILITY
1. Introduction:
In the current era, concerns regarding the legal liability of auditors are on the increasing
scale. The auditors are deemed to be highly significant individuals, since they bear the
responsibility to improve the reliability of the financial statements for all types of external users
(Anantharaman, Pittman and Wans 2016). The auditors are responsible civilly as well as
criminally, as in the case of other professionals like architects and physicians. In the absence of
independent and competent auditors, many global fraud cases would not have been identified.
Thus, it is necessary for the auditors to have the required skills and integrity at the time of
auditing the financial statements of the business organisations. The current report would evaluate
the study of “Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay (Bannerman)
(2002)”, here the accountant was suspected to be answerable for professional oversight and as a
result, the firm has been sued for conducting such act.
2. Brief description of key events and factual issues behind the case:
In this paper “Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay
(Bannerman) (2002)”, "RBS" is purported that they have forfeited over "£ thirteen million" in
unsettled draft provisions to the bankrupt customer, which is "APC Limited". According to RBS,
owing to fraud, the accounts of the past years had resulted in misstatement of the actual financial
position of the organisation and negligence was identified from the end of the defendants in not
identifying the same (Bailii.org 2019). The main lender or banker of the organisation was RBS
and with the passage of time, it had exercised options in order to subscribe for maximum shares
of the organisation. One of the needs of the lending agreement was to send the audited accounts
and monthly management accounts to the bank at the time the same was practicable. APC
1. Introduction:
In the current era, concerns regarding the legal liability of auditors are on the increasing
scale. The auditors are deemed to be highly significant individuals, since they bear the
responsibility to improve the reliability of the financial statements for all types of external users
(Anantharaman, Pittman and Wans 2016). The auditors are responsible civilly as well as
criminally, as in the case of other professionals like architects and physicians. In the absence of
independent and competent auditors, many global fraud cases would not have been identified.
Thus, it is necessary for the auditors to have the required skills and integrity at the time of
auditing the financial statements of the business organisations. The current report would evaluate
the study of “Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay (Bannerman)
(2002)”, here the accountant was suspected to be answerable for professional oversight and as a
result, the firm has been sued for conducting such act.
2. Brief description of key events and factual issues behind the case:
In this paper “Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay
(Bannerman) (2002)”, "RBS" is purported that they have forfeited over "£ thirteen million" in
unsettled draft provisions to the bankrupt customer, which is "APC Limited". According to RBS,
owing to fraud, the accounts of the past years had resulted in misstatement of the actual financial
position of the organisation and negligence was identified from the end of the defendants in not
identifying the same (Bailii.org 2019). The main lender or banker of the organisation was RBS
and with the passage of time, it had exercised options in order to subscribe for maximum shares
of the organisation. One of the needs of the lending agreement was to send the audited accounts
and monthly management accounts to the bank at the time the same was practicable. APC
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
4AUDITORS AND LEGAL LIABILITY
enjoyed the financial facilities as well as rebates based on the audit statement of Bannerman.
This clearly signifies the absence of adequate information about the clause of accountability to
the "minor party" in the report of the auditor.
It has been found that the disclaimers mentioned in the policies might not eliminate the
liability; however, it could eliminate the scope of assuming the liability to the same for the courts
(Aobdia and Shroff 2017). Therefore, owing to the presence of the disclaimers, the audit report
has been invalid to the organisations. The disclaimers develop the impediment to litigation,
which minimises pressure to the audit firm for carrying out good quality audits in the first place.
3. Responsible parties of the case and evaluation of the appropriateness of damages or
penalties imposed:
From the verdict of the court, RBS was in a favourable position by depending upon the
fact that the auditors were aware of the existence of the external mediator along with the usage to
which the data could be placed and that the bank aimed to depend on it for known purpose
(Asare, Wright and Zimbelman 2015). According to RBS, the auditors needed to owe a duty of
care, which was violated at the time of negligent auditing of accounts and as a result, the bank
encountered significant loss. In providing response to the claim of the bank, the auditors stated
that the bank was not able to maintain adequate proximity between the bank and the auditors.
According to the court, the following factors have to be taken into consideration, which might
help the bank in developing a connection:
The actuaries recognised that "RBS" was a substantial creditor and shareholder of the
organisation and it was the main banker as well.
enjoyed the financial facilities as well as rebates based on the audit statement of Bannerman.
This clearly signifies the absence of adequate information about the clause of accountability to
the "minor party" in the report of the auditor.
It has been found that the disclaimers mentioned in the policies might not eliminate the
liability; however, it could eliminate the scope of assuming the liability to the same for the courts
(Aobdia and Shroff 2017). Therefore, owing to the presence of the disclaimers, the audit report
has been invalid to the organisations. The disclaimers develop the impediment to litigation,
which minimises pressure to the audit firm for carrying out good quality audits in the first place.
3. Responsible parties of the case and evaluation of the appropriateness of damages or
penalties imposed:
From the verdict of the court, RBS was in a favourable position by depending upon the
fact that the auditors were aware of the existence of the external mediator along with the usage to
which the data could be placed and that the bank aimed to depend on it for known purpose
(Asare, Wright and Zimbelman 2015). According to RBS, the auditors needed to owe a duty of
care, which was violated at the time of negligent auditing of accounts and as a result, the bank
encountered significant loss. In providing response to the claim of the bank, the auditors stated
that the bank was not able to maintain adequate proximity between the bank and the auditors.
According to the court, the following factors have to be taken into consideration, which might
help the bank in developing a connection:
The actuaries recognised that "RBS" was a substantial creditor and shareholder of the
organisation and it was the main banker as well.
5AUDITORS AND LEGAL LIABILITY
The organisation had close association with the accountants and an individual of the
organisation was to assist the audit as the comptroller general.
The functioning of the organisation was reliant largely on cash and it depended largely
upon capital accessible on bank liquidation (Bigus 2015).
In a manner to fulfil, so that the organisation would be capable to operate as a well-
playing business for the upcoming period needed for the scrutinised statement, the
accountants need to be conscious of the presence of "liquidation" and its articles. These
terminologies constituted of a commitment on the organisation in providing the bank with
the reprints of the accounts of intermittent supervision as well as the analysed yearly
reports.
Despite having full knowledge of the fact that in accordance with the overdraft facility
terms the organisation would provide the audited accounts to the bank and the bank
would depend on the same in undertaking granting settlements, the actuaries failed to
disclaim responsibility to the bank (Bigus 2016).
In contrast to the debates laid down by the accountants, the bank would not need to reveal
that the actuaries wanted the bank for relying on the reports for a specific reason, it was adequate
that the cashiers was probable to conduct the same. Therefore, the "court" pursued a clean
authority guidance regrading the requirement of no alike goals. Hence, the culpable parties in
this case were the auditors of RBS. Although the auditors made further appeal, the plea was
dismissed by the "Scottish Court of Session" in 2005. It was clearly stated that it is possible for
the auditors to establish duty of care even if there is no such intention by the auditors. This
clearly denotes the absence of obligation of responsibility to the "minor parties" (Brasel et al.
2016).
The organisation had close association with the accountants and an individual of the
organisation was to assist the audit as the comptroller general.
The functioning of the organisation was reliant largely on cash and it depended largely
upon capital accessible on bank liquidation (Bigus 2015).
In a manner to fulfil, so that the organisation would be capable to operate as a well-
playing business for the upcoming period needed for the scrutinised statement, the
accountants need to be conscious of the presence of "liquidation" and its articles. These
terminologies constituted of a commitment on the organisation in providing the bank with
the reprints of the accounts of intermittent supervision as well as the analysed yearly
reports.
Despite having full knowledge of the fact that in accordance with the overdraft facility
terms the organisation would provide the audited accounts to the bank and the bank
would depend on the same in undertaking granting settlements, the actuaries failed to
disclaim responsibility to the bank (Bigus 2016).
In contrast to the debates laid down by the accountants, the bank would not need to reveal
that the actuaries wanted the bank for relying on the reports for a specific reason, it was adequate
that the cashiers was probable to conduct the same. Therefore, the "court" pursued a clean
authority guidance regrading the requirement of no alike goals. Hence, the culpable parties in
this case were the auditors of RBS. Although the auditors made further appeal, the plea was
dismissed by the "Scottish Court of Session" in 2005. It was clearly stated that it is possible for
the auditors to establish duty of care even if there is no such intention by the auditors. This
clearly denotes the absence of obligation of responsibility to the "minor parties" (Brasel et al.
2016).
6AUDITORS AND LEGAL LIABILITY
4. Investigation and explanation of the relevant issues in accounting and auditing
highlighted in the case:
From the selected case, the main issues in accounting and auditing profession are
discussed briefly as follows:
The rising price in the business, initially from protecting and resolving assertions along
with enfolding coverage bonuses
The prospective for subsequent rise in scrutiny charges in order to envelope the
increasing prices (Chi and Weng 2014)
The comprehensive absence of adequate "coverage" enveloping in the industry compared
to the magnitude of few of the "assertions"
Lack of rivalry in the "scrutiny market" for huge and enlisted organisations
5. Root-cause of the identified issues:
The auditors play a pivotal part in organisational connections with the "third forces" by
helping the administration in providing effective monetary guidance while building the
businesses trading with those companies. The root-cause of the above-identified issues is
discussed as follows:
Liability of negligence:
Auditors are accountable for the negligent activities, although they did not carry out their
duties carefully, which could result in loss for the organisation in the form of loss of the financial
position. This liability occurs during the period the "actuaries" did not implement the accurate
monetary statements because of the inability of performing the action with diligence and care
4. Investigation and explanation of the relevant issues in accounting and auditing
highlighted in the case:
From the selected case, the main issues in accounting and auditing profession are
discussed briefly as follows:
The rising price in the business, initially from protecting and resolving assertions along
with enfolding coverage bonuses
The prospective for subsequent rise in scrutiny charges in order to envelope the
increasing prices (Chi and Weng 2014)
The comprehensive absence of adequate "coverage" enveloping in the industry compared
to the magnitude of few of the "assertions"
Lack of rivalry in the "scrutiny market" for huge and enlisted organisations
5. Root-cause of the identified issues:
The auditors play a pivotal part in organisational connections with the "third forces" by
helping the administration in providing effective monetary guidance while building the
businesses trading with those companies. The root-cause of the above-identified issues is
discussed as follows:
Liability of negligence:
Auditors are accountable for the negligent activities, although they did not carry out their
duties carefully, which could result in loss for the organisation in the form of loss of the financial
position. This liability occurs during the period the "actuaries" did not implement the accurate
monetary statements because of the inability of performing the action with diligence and care
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
7AUDITORS AND LEGAL LIABILITY
and the inability to adhere to the statutory requirements of the organisation (Ghosh and Tang
2015).
Liability of the third parties:
The "minor parties" like the stockholders, bankers, government, shareholders, tariff
commands and organisational investigators rely on the reports of the auditors. The "accountant"
is accountable for representing the monetary declarations and information with precision through
avoidance of the material errors or counting mistakes (Gimbar, Hansen and Ozlanski 2016). If
the financial reports contain material errors and frauds, the auditors have to incur for the
damages taken place owing to negligent operation.
Civil and criminal offence liabilities:
Auditors are accountable for incurring the impairments done from criminal and local
felony operations. The liabilities of the auditors arise in the route of activity of violation of
commitment as well as failure of regulations and laws (Gay and Simnett 2017). The "actuaries"
is identified for the "immoral felony" during the time of not adhering to the need of rules, wrong
representation of the reports and falsified accounts. The auditors depict the wrong reports as well
as falsified financial statements, which could lead for forfeiture of company development and
monetary status of the organisation.
Misstatement in prospectus:
Auditors owe the responsibility to incur the impairments occurring from the distortion in
announcements. According to Hayes, Wallage and Gortemaker (2014), the prospectus invites the
individuals in sharing the bonds or shares of the organisation, although the auditors are
responsible to incur indemnification to the individuals for buying the vouchers or shares of the
and the inability to adhere to the statutory requirements of the organisation (Ghosh and Tang
2015).
Liability of the third parties:
The "minor parties" like the stockholders, bankers, government, shareholders, tariff
commands and organisational investigators rely on the reports of the auditors. The "accountant"
is accountable for representing the monetary declarations and information with precision through
avoidance of the material errors or counting mistakes (Gimbar, Hansen and Ozlanski 2016). If
the financial reports contain material errors and frauds, the auditors have to incur for the
damages taken place owing to negligent operation.
Civil and criminal offence liabilities:
Auditors are accountable for incurring the impairments done from criminal and local
felony operations. The liabilities of the auditors arise in the route of activity of violation of
commitment as well as failure of regulations and laws (Gay and Simnett 2017). The "actuaries"
is identified for the "immoral felony" during the time of not adhering to the need of rules, wrong
representation of the reports and falsified accounts. The auditors depict the wrong reports as well
as falsified financial statements, which could lead for forfeiture of company development and
monetary status of the organisation.
Misstatement in prospectus:
Auditors owe the responsibility to incur the impairments occurring from the distortion in
announcements. According to Hayes, Wallage and Gortemaker (2014), the prospectus invites the
individuals in sharing the bonds or shares of the organisation, although the auditors are
responsible to incur indemnification to the individuals for buying the vouchers or shares of the
8AUDITORS AND LEGAL LIABILITY
organisation on the side of the schemes. The "distortion in announcements" could result in loss
for the client along with losing potentiality with the "schemes".
Liability of professional misconduct and misstatements:
Auditors are accountable for the proficient cipher of ethics along with correct
representation of the "operating statements" for depicting the actual overview of the "monetary
status" of the organisation (Huggins, Simnett and Hargovan 2015). If the auditors are found
guilty of "proficient wrong-doing", the council could cancel the evaluation certificates of the
auditors and they would be incurring the penalties as imprisonment or fine or both.
6. Problems, mistakes or misrepresentations made by the defendants:
According to the defenders of the auditors of RBS, there was absence of relevant
statement of the "prevalence of duty to protect" that the "protectors" have owed to the pursuers
for auditing the accounts of APC. Mr Hanretty was the jumior counsel for the defenders and the
individual opened this aspect of debate by submitting the dependence of the "prevalence of duty
to protect" on the following factors:
On the damage foreseeability that the pursuers suffered owing to the consequence of
reliance on the negligent misstatements of the defenders
On the presence of proximity or neighbourhood relationship between the defenders in the
form of information providers and the pursuers as its receipient
On being just, fair and reasonable in the circumstances that such duty needs to be
imposed on the defenders (Scotcourts.gov.uk 2019)
organisation on the side of the schemes. The "distortion in announcements" could result in loss
for the client along with losing potentiality with the "schemes".
Liability of professional misconduct and misstatements:
Auditors are accountable for the proficient cipher of ethics along with correct
representation of the "operating statements" for depicting the actual overview of the "monetary
status" of the organisation (Huggins, Simnett and Hargovan 2015). If the auditors are found
guilty of "proficient wrong-doing", the council could cancel the evaluation certificates of the
auditors and they would be incurring the penalties as imprisonment or fine or both.
6. Problems, mistakes or misrepresentations made by the defendants:
According to the defenders of the auditors of RBS, there was absence of relevant
statement of the "prevalence of duty to protect" that the "protectors" have owed to the pursuers
for auditing the accounts of APC. Mr Hanretty was the jumior counsel for the defenders and the
individual opened this aspect of debate by submitting the dependence of the "prevalence of duty
to protect" on the following factors:
On the damage foreseeability that the pursuers suffered owing to the consequence of
reliance on the negligent misstatements of the defenders
On the presence of proximity or neighbourhood relationship between the defenders in the
form of information providers and the pursuers as its receipient
On being just, fair and reasonable in the circumstances that such duty needs to be
imposed on the defenders (Scotcourts.gov.uk 2019)
9AUDITORS AND LEGAL LIABILITY
Within the specific context of thee alleged liability in relation to negligent misstatements,
proximity was to be gauged and the defender submitted by reference to whether:
The individuals delivering information was actually aware that the information would be
provided the claimant, while the claimant was an member or an individual of the
identifiable class
There was communication of information for a specific purpose
The individual delivering information knew that the claimant would depend on the same
for specific purpose
Moreover, Mr Hanretty emphasised on the fact that until 1964, there was no recognition
of liability for negligent misstatements when there are no contractual obligations or fiduciary
duties. However, these claims do not hold true because like organisations or individuals, "the
actuaries are obligated by rules" in the nations where these people "practice" (Kadous and
Mercer 2014). Therefore, in accordance with the existing criminal law, there could be
prosecution for the auditors like insider trading and fraud. In UK, audit is subject to regulations
mentioned in the Companies Act 2006. This comprises of a cluster of categories governing
regarding the selection of "actuaries", the ways through which the "accountants" are selected and
disposed and the duties of the "actuaries".
Solitary notable "felony" from the "Companies Act" is that of recklessly or knowingly
resulting a case covered by "Section 495" (report of the "accountant" on yearly details of the
organisation) to incorporate any deceptive, negative or confusing matter, which is specific, in
accordance "Section 507" (Legislation.gov.uk 2019). This implies that the auditors would be
summoned in a "criminal court" for either recklessly or knowingly through issuance of an
unsuitable audit opinion.
Within the specific context of thee alleged liability in relation to negligent misstatements,
proximity was to be gauged and the defender submitted by reference to whether:
The individuals delivering information was actually aware that the information would be
provided the claimant, while the claimant was an member or an individual of the
identifiable class
There was communication of information for a specific purpose
The individual delivering information knew that the claimant would depend on the same
for specific purpose
Moreover, Mr Hanretty emphasised on the fact that until 1964, there was no recognition
of liability for negligent misstatements when there are no contractual obligations or fiduciary
duties. However, these claims do not hold true because like organisations or individuals, "the
actuaries are obligated by rules" in the nations where these people "practice" (Kadous and
Mercer 2014). Therefore, in accordance with the existing criminal law, there could be
prosecution for the auditors like insider trading and fraud. In UK, audit is subject to regulations
mentioned in the Companies Act 2006. This comprises of a cluster of categories governing
regarding the selection of "actuaries", the ways through which the "accountants" are selected and
disposed and the duties of the "actuaries".
Solitary notable "felony" from the "Companies Act" is that of recklessly or knowingly
resulting a case covered by "Section 495" (report of the "accountant" on yearly details of the
organisation) to incorporate any deceptive, negative or confusing matter, which is specific, in
accordance "Section 507" (Legislation.gov.uk 2019). This implies that the auditors would be
summoned in a "criminal court" for either recklessly or knowingly through issuance of an
unsuitable audit opinion.
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
10AUDITORS AND LEGAL LIABILITY
Civil law is of two pieces having specific importance to the audit profession, which
include the "rule of immorality and agreement rule". Hence, the principles for "actuary" liability
could be developed in relation to the third parties and clients (Kanagaretnam et al. 2016).
Likewise the agreement rule, the parties might seek remedy for violation of "agree-mental
responsibilities". Hence, it is possible for the shareholders to obtain cure from an "accountant",
when they decline to adhere to the engagement letter terminologies. Moreover, since the auditors
of RBS could be pursued for carelessness; in case, a duty of care is violated against a "third
force" accordingly suffering from any kind of "forfeiture".
7. Recommendations:
7.1 Audit strategy:
There are various ways where the "scrutiny companies" could handle their vulnerability
to the negligence "assertions". Therefore, the superb clear-cut strategy is to avoid carelessness in
actuality in the initial stage (Kausar, Taffler and Tan 2017). From the practical perspective, this
implies the application of "international standards on auditing" along with the cipher of legality
for "proficient accountants" while giving adequate focus on the conditions and terms, which are
combined in the letter of engagement. However, it is noteworthy to mention that enhancements
in standard governing in contrast to the existing volume might not take place, if the audit firms
do not undertake adequate investments. With the increasing burden of minimising audit fees, it is
not probable that the organisations would intend to perform to the extent, in order to rise in price
besides there is a perception that such activity would result in longstanding minimisations in
insurance and legal expenses (Mo, Rui and Wu 2015).
Civil law is of two pieces having specific importance to the audit profession, which
include the "rule of immorality and agreement rule". Hence, the principles for "actuary" liability
could be developed in relation to the third parties and clients (Kanagaretnam et al. 2016).
Likewise the agreement rule, the parties might seek remedy for violation of "agree-mental
responsibilities". Hence, it is possible for the shareholders to obtain cure from an "accountant",
when they decline to adhere to the engagement letter terminologies. Moreover, since the auditors
of RBS could be pursued for carelessness; in case, a duty of care is violated against a "third
force" accordingly suffering from any kind of "forfeiture".
7. Recommendations:
7.1 Audit strategy:
There are various ways where the "scrutiny companies" could handle their vulnerability
to the negligence "assertions". Therefore, the superb clear-cut strategy is to avoid carelessness in
actuality in the initial stage (Kausar, Taffler and Tan 2017). From the practical perspective, this
implies the application of "international standards on auditing" along with the cipher of legality
for "proficient accountants" while giving adequate focus on the conditions and terms, which are
combined in the letter of engagement. However, it is noteworthy to mention that enhancements
in standard governing in contrast to the existing volume might not take place, if the audit firms
do not undertake adequate investments. With the increasing burden of minimising audit fees, it is
not probable that the organisations would intend to perform to the extent, in order to rise in price
besides there is a perception that such activity would result in longstanding minimisations in
insurance and legal expenses (Mo, Rui and Wu 2015).
11AUDITORS AND LEGAL LIABILITY
The "solitary" results of the "Bannerman case" was the possible vulnerability of the
"accountants" to lawsuit from the external forces where no liability disclosures were made.
Therefore, it is necessary to incorporate a clause of accountability to the external "forces" in the
audit report "statement" (Philipsen 2014). Even though disclaimers might not be able to
eliminate liability to the external parties, they assist in minimising the range of the courts in
assuming "accountability" to them. However, it is to be borne in mind that although it should
minimise the litigation threat in UK, this protection might not extend in cross-border nations, as
the clause is dependent on a decision from the "court case" in UK. This gives no defence from
the litigation hazard as well from the customers in accordance with the contract law. Moreover,
the reviewers of the "Bannerman case" feel that the disclaimer acts in the form of an impediment
to "lawsuit", it minimises the compulsion of "carrying-out" sound standardised evaluations in the
initial phase. Hence, it reduces the scrutiny declaration credibility noticeable to the users and
hence, it has to be accompanied by other audit programs.
7.2 Audit program:
The auditors have obtained the permission in accordance with the Companies Act to
utilise liability limitation agreements since 2008. The objective is to minimise the litigation
threat from the clients (Simunic, Ye and Zhang 2015). These agreements are defined as clauses
developed within the engagement terminologies magnifying a lid on the sum of compensation,
which could be sought from the creditor. The shareholders are required approving these
agreements yearly and they have to be upheld by judges in the form of fair and reasonable when
situations take place. However, both the audit strategy and audit program have to be supported
by other effective measures for dealing with the threat to litigation appropriately.
The "solitary" results of the "Bannerman case" was the possible vulnerability of the
"accountants" to lawsuit from the external forces where no liability disclosures were made.
Therefore, it is necessary to incorporate a clause of accountability to the external "forces" in the
audit report "statement" (Philipsen 2014). Even though disclaimers might not be able to
eliminate liability to the external parties, they assist in minimising the range of the courts in
assuming "accountability" to them. However, it is to be borne in mind that although it should
minimise the litigation threat in UK, this protection might not extend in cross-border nations, as
the clause is dependent on a decision from the "court case" in UK. This gives no defence from
the litigation hazard as well from the customers in accordance with the contract law. Moreover,
the reviewers of the "Bannerman case" feel that the disclaimer acts in the form of an impediment
to "lawsuit", it minimises the compulsion of "carrying-out" sound standardised evaluations in the
initial phase. Hence, it reduces the scrutiny declaration credibility noticeable to the users and
hence, it has to be accompanied by other audit programs.
7.2 Audit program:
The auditors have obtained the permission in accordance with the Companies Act to
utilise liability limitation agreements since 2008. The objective is to minimise the litigation
threat from the clients (Simunic, Ye and Zhang 2015). These agreements are defined as clauses
developed within the engagement terminologies magnifying a lid on the sum of compensation,
which could be sought from the creditor. The shareholders are required approving these
agreements yearly and they have to be upheld by judges in the form of fair and reasonable when
situations take place. However, both the audit strategy and audit program have to be supported
by other effective measures for dealing with the threat to litigation appropriately.
12AUDITORS AND LEGAL LIABILITY
7.3 Other effective measures:
The role and liabilities of the auditor have to be enhanced in order to improve the
financial performance as well as "monetary operations" of the organisation. For this, the
"actuaries" need to possess sufficient mastery on the inner evaluating process of the organisation
by developing and depicting the "operating statements" accurately and appropriately (Tepalagul
and Lin 2015). In addition, it is necessary to represent financial announcements and correct
book-keeping data to the senior management. This would assist the management in undertaking
correct decisions about budgeting and capital investment, financial and economic forecasting,
pricing policy, material purchasing and asset management.
The auditors have to improve their skills as well as potential liabilities so that the clients
could rely more on their reports as well as "examined operating statements", that are precise,
unbiased and pertinent for the "administrators". In addition to this, the financial institutions such
as lenders, bankers and insurance firms need to focus on to the threat analysis and
"administration" to minimise the probabilities of "monetary" insolvency and instability.
Auditors are required expressing their potential liabilities by offering a judgement on the
accuracy of accounting and "financial grades" for gaining assurance of the individuals.
Therefore, the audit reports and financial data have to be presented by adhering to the prevailing
auditing and accounting standards (Wilson 2015). As a result, limitation liability agreements
would be appropriate for the organisation in order to assure "accountability" restrictions for the
"accountants" overdue by the organisation in situations of "carelessness", default, violation of
"commitments", exaggerations, trusts and violation of obligations. This might be appropriate for
the organisations to assure liberty or exemption of the "actuaries" from the impact of the
management. Finally, exclusive meetings or informal meetings with the "cashiers" when the
7.3 Other effective measures:
The role and liabilities of the auditor have to be enhanced in order to improve the
financial performance as well as "monetary operations" of the organisation. For this, the
"actuaries" need to possess sufficient mastery on the inner evaluating process of the organisation
by developing and depicting the "operating statements" accurately and appropriately (Tepalagul
and Lin 2015). In addition, it is necessary to represent financial announcements and correct
book-keeping data to the senior management. This would assist the management in undertaking
correct decisions about budgeting and capital investment, financial and economic forecasting,
pricing policy, material purchasing and asset management.
The auditors have to improve their skills as well as potential liabilities so that the clients
could rely more on their reports as well as "examined operating statements", that are precise,
unbiased and pertinent for the "administrators". In addition to this, the financial institutions such
as lenders, bankers and insurance firms need to focus on to the threat analysis and
"administration" to minimise the probabilities of "monetary" insolvency and instability.
Auditors are required expressing their potential liabilities by offering a judgement on the
accuracy of accounting and "financial grades" for gaining assurance of the individuals.
Therefore, the audit reports and financial data have to be presented by adhering to the prevailing
auditing and accounting standards (Wilson 2015). As a result, limitation liability agreements
would be appropriate for the organisation in order to assure "accountability" restrictions for the
"accountants" overdue by the organisation in situations of "carelessness", default, violation of
"commitments", exaggerations, trusts and violation of obligations. This might be appropriate for
the organisations to assure liberty or exemption of the "actuaries" from the impact of the
management. Finally, exclusive meetings or informal meetings with the "cashiers" when the
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
13AUDITORS AND LEGAL LIABILITY
management of the organisation is present would assist the former in maintaining transparency
on perceptible problems of the audit reports and "operating statements".
8. Conclusion:
Based on the above discussion, it has been identified that "RBS" has professed that they
have bemused over "£ thirteen million" in outstanding draft aptitudes to the "bankrupt"
consumer, which is "APC" Limited. According to RBS, owing to fraud, the accounts of the past
years had resulted in misstatement of the actual financial position of the organisation and
negligence was identified from the end of the defendants in not identifying the same. From the
verdict of the court, RBS was in a favourable position by depending on the fact that the auditors
perceived the status of the external "force" along with the utility to which the data might be
placed and that the bank aimed to depend on it for known purpose. This is because the auditor
failed to provide "obligation of supervision to RBS".
According to the defenders of the "actuaries" of "RBS", there was absence of relevant
statement of the " obligation of supervision" that the accused have owed to the pursuers for
auditing the accounts of APC. However, these claims do not hold true because like organisations
or individuals, the "accountants are constrained by the rules" in the nations where they
"practice". Therefore, in accordance with the existing criminal law, there could be prosecution
for the auditors like insider trading and fraud. Therefore, the auditors have to improve their skills
as well as potential liabilities so that the clients could rely more on their reports as well as
analysed "operating statements", that are "precise", unbiased and pertinent for the
"administrators". In addition to this, the financial institutions such as lenders, bankers and
management of the organisation is present would assist the former in maintaining transparency
on perceptible problems of the audit reports and "operating statements".
8. Conclusion:
Based on the above discussion, it has been identified that "RBS" has professed that they
have bemused over "£ thirteen million" in outstanding draft aptitudes to the "bankrupt"
consumer, which is "APC" Limited. According to RBS, owing to fraud, the accounts of the past
years had resulted in misstatement of the actual financial position of the organisation and
negligence was identified from the end of the defendants in not identifying the same. From the
verdict of the court, RBS was in a favourable position by depending on the fact that the auditors
perceived the status of the external "force" along with the utility to which the data might be
placed and that the bank aimed to depend on it for known purpose. This is because the auditor
failed to provide "obligation of supervision to RBS".
According to the defenders of the "actuaries" of "RBS", there was absence of relevant
statement of the " obligation of supervision" that the accused have owed to the pursuers for
auditing the accounts of APC. However, these claims do not hold true because like organisations
or individuals, the "accountants are constrained by the rules" in the nations where they
"practice". Therefore, in accordance with the existing criminal law, there could be prosecution
for the auditors like insider trading and fraud. Therefore, the auditors have to improve their skills
as well as potential liabilities so that the clients could rely more on their reports as well as
analysed "operating statements", that are "precise", unbiased and pertinent for the
"administrators". In addition to this, the financial institutions such as lenders, bankers and
14AUDITORS AND LEGAL LIABILITY
insurance firms need to provide focus upon the "threat" analysis and "administration" to
minimise the potentiality of "monetary" insolvency and instability.
insurance firms need to provide focus upon the "threat" analysis and "administration" to
minimise the potentiality of "monetary" insolvency and instability.
15AUDITORS AND LEGAL LIABILITY
References:
Anantharaman, D., Pittman, J.A. and Wans, N., 2016. State liability regimes within the United
States and auditor reporting. The Accounting Review, 91(6), pp.1545-1575.
Aobdia, D. and Shroff, N., 2017. Regulatory oversight and auditor market share. Journal of
Accounting and Economics, 63(2-3), pp.262-287.
Asare, S.K., Wright, A. and Zimbelman, M.F., 2015. Challenges facing auditors in detecting
financial statement fraud: Insights from fraud investigations. Journal of Forensic & Investigative
Accounting, 7(2), pp.63-112.
Bailii.org., 2019. Royal Bank Of Scotland Plc v. Bannerman Johnstone Maclay [2005] ScotCS
CSIH_39 (26 May 2005). [online] Available at:
http://www.bailii.org/cgi-bin/markup.cgi?doc=/scot/cases/ScotCS/2005/CSIH_39.html
[Accessed 1 May 2019].
Bigus, J., 2015. Loss aversion, audit risk judgments, and auditor liability. European Accounting
Review, 24(3), pp.581-606.
Bigus, J., 2016. Optimism and auditor liability. Accounting and Business Research, 46(6),
pp.577-600.
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative
outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The
Accounting Review, 91(5), pp.1345-1362.
Chi, H.Y. and Weng, T.C., 2014. Managerial legal liability and Big 4 auditor choice. Journal of
Business Research, 67(9), pp.1857-1869.
References:
Anantharaman, D., Pittman, J.A. and Wans, N., 2016. State liability regimes within the United
States and auditor reporting. The Accounting Review, 91(6), pp.1545-1575.
Aobdia, D. and Shroff, N., 2017. Regulatory oversight and auditor market share. Journal of
Accounting and Economics, 63(2-3), pp.262-287.
Asare, S.K., Wright, A. and Zimbelman, M.F., 2015. Challenges facing auditors in detecting
financial statement fraud: Insights from fraud investigations. Journal of Forensic & Investigative
Accounting, 7(2), pp.63-112.
Bailii.org., 2019. Royal Bank Of Scotland Plc v. Bannerman Johnstone Maclay [2005] ScotCS
CSIH_39 (26 May 2005). [online] Available at:
http://www.bailii.org/cgi-bin/markup.cgi?doc=/scot/cases/ScotCS/2005/CSIH_39.html
[Accessed 1 May 2019].
Bigus, J., 2015. Loss aversion, audit risk judgments, and auditor liability. European Accounting
Review, 24(3), pp.581-606.
Bigus, J., 2016. Optimism and auditor liability. Accounting and Business Research, 46(6),
pp.577-600.
Brasel, K., Doxey, M.M., Grenier, J.H. and Reffett, A., 2016. Risk disclosure preceding negative
outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The
Accounting Review, 91(5), pp.1345-1362.
Chi, H.Y. and Weng, T.C., 2014. Managerial legal liability and Big 4 auditor choice. Journal of
Business Research, 67(9), pp.1857-1869.
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
16AUDITORS AND LEGAL LIABILITY
Chiang, H.T., Lin, S.L. and He, L.J., 2015. Implications of auditor characteristics and directors'
and officers' liability insurance for going-concern audit opinions: evidence from
Taiwan. International Business Research, 8(5), p.130.
Gay, G. and Simnett, R., 2017. Auditing & Assurance Services in Australia, 6th Edition. McGraw
Hill Education.
Ghosh, A. and Tang, C.Y., 2015. Auditor resignation and risk factors. Accounting
Horizons, 29(3), pp.529-549.
Gimbar, C., Hansen, B. and Ozlanski, M.E., 2016. The effects of critical audit matter paragraphs
and accounting standard precision on auditor liability. The Accounting Review, 91(6), pp.1629-
1646.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Huggins, A., Simnett, R. and Hargovan, A., 2015. Integrated reporting and directors’ concerns
about personal liability exposure: Law reform options. Company and Securities Law Journal, 33,
pp.176-195.
Kadous, K. and Mercer, M., 2014. Are juries more likely to second-guess auditors under
imprecise accounting standards?. Auditing: A Journal of Practice & Theory, 35(1), pp.101-117.
Kanagaretnam, K., Lee, J., Lim, C.Y. and Lobo, G.J., 2016. Relation between auditor quality and
tax aggressiveness: Implications of cross-country institutional differences. Auditing: A Journal of
Practice & Theory, 35(4), pp.105-135.
Chiang, H.T., Lin, S.L. and He, L.J., 2015. Implications of auditor characteristics and directors'
and officers' liability insurance for going-concern audit opinions: evidence from
Taiwan. International Business Research, 8(5), p.130.
Gay, G. and Simnett, R., 2017. Auditing & Assurance Services in Australia, 6th Edition. McGraw
Hill Education.
Ghosh, A. and Tang, C.Y., 2015. Auditor resignation and risk factors. Accounting
Horizons, 29(3), pp.529-549.
Gimbar, C., Hansen, B. and Ozlanski, M.E., 2016. The effects of critical audit matter paragraphs
and accounting standard precision on auditor liability. The Accounting Review, 91(6), pp.1629-
1646.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Huggins, A., Simnett, R. and Hargovan, A., 2015. Integrated reporting and directors’ concerns
about personal liability exposure: Law reform options. Company and Securities Law Journal, 33,
pp.176-195.
Kadous, K. and Mercer, M., 2014. Are juries more likely to second-guess auditors under
imprecise accounting standards?. Auditing: A Journal of Practice & Theory, 35(1), pp.101-117.
Kanagaretnam, K., Lee, J., Lim, C.Y. and Lobo, G.J., 2016. Relation between auditor quality and
tax aggressiveness: Implications of cross-country institutional differences. Auditing: A Journal of
Practice & Theory, 35(4), pp.105-135.
17AUDITORS AND LEGAL LIABILITY
Kausar, A., Taffler, R.J. and Tan, C.E., 2017. Legal regimes and investor response to the
auditor’s going-concern opinion. Journal of Accounting, Auditing & Finance, 32(1), pp.40-72.
Legislation.gov.uk., 2019. [online] Available at:
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf [Accessed 3 May
2019].
Mo, P.L., Rui, O.M. and Wu, X., 2015. Auditors' going concern reporting in the pre-and post-
bankruptcy law eras: Chinese affiliates of Big 4 versus local auditors. The international Journal
of accounting, 50(1), pp.1-30.
Philipsen, N.J., 2014. Limiting Auditors’ Liability: The Case for (and Against) EU
Intervention. The Geneva Papers on Risk and Insurance-Issues and Practice, 39(3), pp.585-597.
Scotcourts.gov.uk., 2019. ROYAL BANK OF SCOTLAND v. BANNERMAN JOHNSTON
MACLAY AND OTHERS . [online] Available at: https://www.scotcourts.gov.uk/search-
judgments/judgment?id=385587a6-8980-69d2-b500-ff0000d74aa7 [Accessed 3 May 2019].
Simunic, D.A., Ye, M. and Zhang, P., 2015. Audit Quality, Auditing Standards, and Legal
Regimes: Implications for International Auditing Standards. Journal of International Accounting
Research, 14(2), pp.221-234.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Wilson, R., 2015. The impact of auditor reputation on jurors’ assessment of auditor liability in a
limited liability regime: financially important nonpublic clients. Journal of Accounting and
Finance, 15(1), pp.23-39.
Kausar, A., Taffler, R.J. and Tan, C.E., 2017. Legal regimes and investor response to the
auditor’s going-concern opinion. Journal of Accounting, Auditing & Finance, 32(1), pp.40-72.
Legislation.gov.uk., 2019. [online] Available at:
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf [Accessed 3 May
2019].
Mo, P.L., Rui, O.M. and Wu, X., 2015. Auditors' going concern reporting in the pre-and post-
bankruptcy law eras: Chinese affiliates of Big 4 versus local auditors. The international Journal
of accounting, 50(1), pp.1-30.
Philipsen, N.J., 2014. Limiting Auditors’ Liability: The Case for (and Against) EU
Intervention. The Geneva Papers on Risk and Insurance-Issues and Practice, 39(3), pp.585-597.
Scotcourts.gov.uk., 2019. ROYAL BANK OF SCOTLAND v. BANNERMAN JOHNSTON
MACLAY AND OTHERS . [online] Available at: https://www.scotcourts.gov.uk/search-
judgments/judgment?id=385587a6-8980-69d2-b500-ff0000d74aa7 [Accessed 3 May 2019].
Simunic, D.A., Ye, M. and Zhang, P., 2015. Audit Quality, Auditing Standards, and Legal
Regimes: Implications for International Auditing Standards. Journal of International Accounting
Research, 14(2), pp.221-234.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
Wilson, R., 2015. The impact of auditor reputation on jurors’ assessment of auditor liability in a
limited liability regime: financially important nonpublic clients. Journal of Accounting and
Finance, 15(1), pp.23-39.
1 out of 18
Related Documents
Your All-in-One AI-Powered Toolkit for Academic Success.
+13062052269
info@desklib.com
Available 24*7 on WhatsApp / Email
Unlock your academic potential
© 2024 | Zucol Services PVT LTD | All rights reserved.