Auditors and the Legal Liability

Running head: AUDITORS AND THE LEGAL LIABILITY
Auditors and the Legal Liability
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AUDITORS AND THE LEGAL LIABILITY
Executive Summary
The purpose of this report is understand the role of auditor in the auditing the financial
statement of the book of company. Based on the opinion on the auditing report different
stakeholder take their respective economic decision. For instance the financial institution
verify the credibility of the borrowing firm in advancing the loan amount based on the
auditing report. Further the report discusses about the liability which an auditor can face with
respect to their work performance. At the end the report discusses about the strategies
through which the auditor can improve the audit quality and audit effectiveness.

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AUDITORS AND THE LEGAL LIABILITY
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Royal Bank of Scotland (RBS) vs. Bannerman Johnstone Maclay ('Bannerman')................3
Duty of care................................................................................................................................4
Bannerman clarification.............................................................................................................5
Auditor responsibility.................................................................................................................6
Legal liability.............................................................................................................................8
Criminal liability....................................................................................................................8
Civil liability..........................................................................................................................8
Protection from Exposure to liability.........................................................................................9
Audit quality...........................................................................................................................9
Disclaimers of liability.........................................................................................................10
Liability Limitation Agreement...........................................................................................11
Mitigation of Litigation chances..............................................................................................12
Improving the audit effectiveness............................................................................................12
Conclusion................................................................................................................................13
References................................................................................................................................15

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AUDITORS AND THE LEGAL LIABILITY
Introduction
The aim of this report is understand the auditor responsibility with respect to public
interest and audit quality. For this purpose a famous case study of Royal Bank of Scotland
(RBS) vs. Bannerman (2002) has been taken to analyse the impact of increasing concern over
the auditor liability and professional reputation maintenance (Abbott et.al, 2016). For the
better understanding of the topic the report has been classified into different part which
focusses on the auditor's professional, legal and ethical responsibilities to their clients and
third parties.
Further the report provides the different procedure through which the auditor of a
company can improve the audit quality and audit effectiveness. Such procedure involve
planning an audit procedure based on the knowledge of client business, evaluating the
effectiveness internal control existing within the organization and the assessment of the
business risk. At last the report provide a road map to the auditor in order to minimize the
litigation and the protection of professional integrity and reputation (Alzeban, and Gwilliam,
2014).
Discussion
Royal Bank of Scotland (RBS) vs. Bannerman Johnstone Maclay
('Bannerman')
This is the famous case study to know the duties of an auditor towards their client and
the third party. As per the case, Royal bank of Scotland (RBS) is the major lender to provide
loan to APC Ltd, and the Bannerman Johnstone is the auditor firm, who have audited the

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AUDITORS AND THE LEGAL LIABILITY
financial statement of the company APC Ltd (Badara, and Saidin, 2013). Here the RBS Ltd
has advanced the bank loan to the subsidiary which wholly owned by the APC Ltd. The RBS
Ltd has lost his money, which he has advanced to APC Ltd. As APC Ltd has become
bankrupt and insolvent. RBS claim that the company has lost $ 13 million. The RBS has sued
to Bannerman, because the company said that it has advanced the loan amount to APC Ltd on
the basis of the financial statement which has been audited by the Bannerman. RBS claim
that Bannerman auditing firm has not accomplished his duty of care toward the company
(Chambers and Odar, 2015).
RBS has assessed the credibility of the APC Ltd on the basis of the auditing report
made by the firm. The sufferer company said that there has been serious negligence on the
part of the auditor in misrepresentation of the account, due to which the RBS has not been
able to assess the true credibility of the APC Ltd (D. Chambers 2014).
Further the RBS has raised a serious allegation on the auditing firm that auditor firm
has deliberately misrepresented the financial position of APC Ltd in order to conduct fraud.
They claim that Bannerman member of the firm was an earlier employee of the company
APC Ltd. So there are chances that, the firm has committed such fraud. The RBS Ltd wanted
to recover the lost amount from the Auditing firm Bannerman (Daniela, and Attila, 2013).
Duty of care
In the present case the allegation made by the APC Ltd would be considered true, and the
Bannerman would be considered as the culprit in the whole scenario, only possible
 When it can proved that Bannerman has the knowledge that RBS Ltd is providing
working capital to APC Ltd which is a cash hungry enterprise (Duncan, and
Whittington, 2014).

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AUDITORS AND THE LEGAL LIABILITY
 If it can be proved that the banner man has the facility letters, and it is in the
knowledge of the auditing firm that audited account along with the monthly
management accounts have been provided to the RBS Ltd in order to check the
credibility of the borrowing firm.
Bannerman clarification.
Bannerman had given his clarification regarding by striking out the claim in the court
of law. The auditing firm said that the fact presented by the APC Ltd is not sufficient to prove
that the firm owes a duty of care to him which is a third party. Bannerman argues that the
duty of care would arise only when the bank has taken his decision to provide financial
assistance in the form of loan to APC Ltd solely based on the financial statement of the
company (Endaya and Hanefah, 2013). However, the auditing firm said that there were no
evidences presented with respect to the matter said above.
The firm said that there were no inclination of any contact either direct or indirect between
the Bannerman and the RBS Ltd.
As per the decision of the House of Lords in Caparo Industries Plc. vs. Dickman
[1990] 2 AC 605. The law stated that relation of proximity is said to be existed with the
person who is advising, only when it is proved that
The person know the identity of the person to whom information has been communicated.
 The purpose for which the person has been given advice
 The person to whom the information has been communicated has relied on the advice
based on the known purpose (Hay, Knechel, and Willekens, 2014).