Liability of Auditor and Law of Agency

This article discusses the liability of an auditor and the law of agency. For the liability of an auditor, the article analyzes the law of negligent misstatement and the essential elements needed to prove a defendant liable for negligent misstatement. For the law of agency, the article discusses the relationship between a principal and an agent, the different types of authority granted to an agent, and the circumstances under which a principal can be bound by the actions of an agent. Relevant case laws are also cited to support the analysis.

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Contents
Part I – Liability of the auditor........................................................................................................2
Research Question........................................................................................................................2
Relevant Law...............................................................................................................................2
Research methodology.................................................................................................................3
Solution........................................................................................................................................3
Part 2 Agency..............................................................................................................................3
Research Question........................................................................................................................3
Relevant Law...............................................................................................................................3
Research methodology.................................................................................................................4
Solution........................................................................................................................................4
Reference List..................................................................................................................................6

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Part I – Liability of the auditor
Research Question
The law of negligent mis statement is the core area of law that require analysis in order to
evaluate the given factual scenario. The understanding of the three essential of negligence, that
is, duty of care, breach and damages are the essence of the question raised. After analysis of the
factual situation the prime question that require interpretation is Can Dave be sued by the Bank
for making negligent mis-statement and on what grounds?
Relevant Law
The law of negligence was evaluated with the leading case of Donoghue v. Stevenson [1932],
where the legal duty is imposed on the defendant to make sure that the plaintiff is not harmed
because of the acts/omission of the defendant. This legal principle is now extended to negligent
statements as well and thus emphasis that it is the duty of defendant to make no false statement
which would ultimately cause harm to the plaintiff who is relying on such statement Shaddock&
Associates Pty Ltd V Parramatta City Council [1981]. (Adams 1997)
In Candler v Crane, Christmas & Co [1951] it was held that a statement is said to be made
negligently, when, the defendant is assigned with the task of making a statement, then, it is the
duty of the defendant to make statements with all diligence so that the plaintiff who is relying on
such statements does not suffer harm. But, when harm is cased then the defendant is held to be
liable towards the plaintiff under negligent mis-statement. The duty of care is also extended to
statements of advices as held in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964).
(Latimer 2012)
To prove any defendant for negligent advice or mis-statement, the ingredients include:

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Duty of care – Every defendant before giving advice must be sure that no harm should be caused
to the plaintiff because of his advice. The duty of care is high in situations where the advisor is
aware that the advice that is given by him will be relied upon by the plaintiff and is held in
Mutual Life and Citizens Assurance Co Ltd v Evatt (1968). But, every defendant is duty bound
towards the plaintiff while giving advice provided: (Hocking 1999)
i. The defendant and the plaintiff are neighbours, that is, the advice of defendant will
affect the interest of the plaintiff directly and thus there is nearness amid the two and
is held in San Sebastian Pty Ltd V Minister Adminstering The Enviromental Planning
And Assessment Act (1986).
ii. The plaintiff can be reasonably foreseeable by the defendant as held in Caparo
Industries PLC v Dickman [1990]
iii. That the defendant and the plaintiff are in special relationship. The relationship is
special because the defendant is found to be in controlling position as he is making
the statement and is of the knowledge that the plaintiff is relying on the said
statement, thus, the position of the plaintiff is inferiors. The courts in Hill v Van Erp -
[1997] held that when an advice is given by the defendant to his client which is used
by 3rd party and the defendant is aware of the fact, then, there is a special relationship
that is created amid the defendant and the third party and thus the defendant owns a
duty of care against the third party.
Breach of duty –The duty when fall short of the level of care that is required in any given
situation results in breach of the duty and is held in Karrawirra Wines v State Bank of
South Australia [1994]. (Hocking 1999)

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Damages – The plaintiff should have suffer loss by relying on the advice of the defendant which
is given by the defendant without taking adequate duty of care. But, there must be causation
amid the advice and the loss so caused and the loss mist not be remote and is held in South
Australia Asset Management Corp v York Montague Ltd, [1997].
Research methodology
The relevant resources (primary and secondary) are used to analyse the raised research questions.
The prime focus was to understand the term negligent misstatement and the relevant essentials
that are needed to prove any defendant liable for negligent mis - statement. The evaluation is
supported with relevant case laws.
Solution
Excel Group Company Ltd appoints Dave for preparation of its financial statements. The
statements are then used by the Excel so that a debt can be raised from First National Bank and
Dave is aware of the said fact.
So, Dave at this stage owns a duty of care against the Bank as they are in special relationship, as
the bank is relying on the statements of Dave before granting any debt to Excel and he is aware
of the said fact as held in San Sebastian Pty Ltd V Minister Adminstering The Enviromental
Planning And Assessment Act. Thus, he must make sure that no statements of his should be such
which can cause loss to the bank Dave and Bank are sharing the relationship of proximity and
the Bank is reasonably foreseeable by Dave as held in Hill v Van Erp [1997]. So, Dave must
comply with duty of care against the Bank.
But, this duty of care that is imposed on Dave towards the Bank is breached by him.
Dave has prepared statements of such a nature that if the bank will use the same then it will
certainly not beneficial for the bank and this fact is known to Dave, knowing the said fact Dave

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still prepare statement that will certainly bring loss to the Bank if debt is granted to Excel by
relying on the statements. Thus, there is breach on the part of Dave as rightly held in Karrawirra
Wines v State Bank of South Australia [1994].
Because of the breach, bank has suffered loss. Dave can foresee the presence of loss and the loss
actually caused is the direct result of the advice of Dave (causation), so, there is certainly loss
that caused to Bank because of breach on the part of Dave as analyzed in South Australia Asset
Management Corp v York Montague Ltd, [1997].
So, the duty that is enshrined upon Dave considering the special relationship he is sharing with
the bank, the duty is not met which cause loss to the Bank and thus Dave is liable for the loss so
caused to the bank under the law of negligent mis-statement.
Part 2 Agency
Research Question
The law of agency is the core area of law that require analysis in order to analyse the given
factual scenario. The understanding of the relation amid the principal, its agents and the outsiders
are the essence of the question raised. After analysis of the factual situation the prime questions
that require interpretation is whether the contract by Sam with Elite Car Sale Company Ltd
(Elite) will make Crystal Motor Company Pty Ltd liable (Crystal)?
Relevant Law
The relationship of a principal and an agent is governed by the law of agency. When an agent is
appointed by an agent, then, the law of agency submits that such an agent is permitted to take
actions on behalf of the principal with the outsiders and which is binding on the principal and is
analyzed in Maynegrain Pty Ltd v Compafina Bank, [1982]. (Chapple and Lipton 2002)

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The principal is empowered to grant authority to the agent though various means: (Chapple and
Lipton 2002)
Express Authority – The authorty given by implication or actually are exress authrites:
i. Actual – When the principal by words, conduct or orally gave authority to an agent
and permits him to take acts or omission on his behalf the such is an actual express
authority and is held in Freeman and Lockyer v Buckhurst Park Properties (Mangal)
Ltd [1964].
ii. Implied – In Australia and New Zealand Bank Ltd v Ateliers de Construction
Electriques de Charleroi [1976] it was held that the authority give to the agent which
originates from assumptions, that is from the tasks that are attributed to an agent or
through a contract or constitution , etc, then, it is an implied express authority., this is
an authority by implication.
Ostensible/Apparent authority – In Panorama Developments (Guildford) Ltd v
Fidelis Furnishing Fabrics Ltd [1971] it was held that when the principal undertakes any acts or
omissions or conduct in the presence of an outsider which makes the outsider believe a specific
person is the agent of the principal and has the authority to take acts or omissions on behalf od
the principal, then, if any relationship is entered by such agent and the outsider, then, such
relationship is binding upon the principal provided the outsider is acting in good faith. It was
held in Crabtree-Vickers PL v Australia Direct Mail Advertising &Co PL (1975) that the acts of
the agent within apparent authorty is binsing on the principal and the outsider can sue the
princiapl for contractaul obligations.

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Research methodology
The relevant resources (primary and secondary) are used to analyse the raised research questions.
The prime focus was to understand the law of agency and the relevant essentials that are needed
to prove agents authorities. The evaluation is supported with relevant case laws.
Solution
Crystal is involved in the business of selling and buying of the used cars. The partners of the
Crystal are Sam and John. Both Sam and John are authorized to take contracts up to $10,000 but
any contract above $10,000 is not permitted. So, the facts reveal that there is an authority that is
granted to Sam and John wherein both Sam and John are the authorized representative of Crystal
and if any contract is made by them up to $10,000 is binding on Crystal. So, as per Maynegrain
Pty Ltd v Compafina Bank, there is an actual express authorty that is givne to Sam and John by
Crystal. Crystal cannot deny any contractaul relationhsip that is made by either Sam or John
provided the contractual amount does not exceed $10,000 and as held in Freeman and Lockyer v
Buckhurst Park Properties (Mangal) Ltd [1964].
Now, Elite is another company with which Sam is interties in entering into contract. It is
submitted that Sam on behalf of Crystal is only actually expressly authored to make contract up
to $10,000 and for such an amount he does not require approval of any person, eve from the
Crystal. But, if Sam wants to make a contract of higher amount (higher than $10,000), then, it is
necessary that Sam should tale approval of the commonly.
Now, it is found that Sam made a contract with Elite for an amount of $15,000. Before entering
into the contract Sam take no authorization either from Crystal or from John. This contract is
beyond the power of Sam. So, Crystal is not bound by the contract.

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But, if Elite can prove that Sam possess ostensible authority, then, a contract amid crystal and
Elite can be established, Elite has to prove that Crystal has undertaken some overt act which
made Elite to believe that Sam has the authority to bind Crystal by his acts ad such authority is
not limited, provided, Elite itself is acting in good faith. There is no obligation that is imposed on
Elite that it should first check whether Sam has the authority to act for Crystal for such an
extended amount Sam was continuously representing Crystal whole buying and selling the used
care in behalf of Crystal and Crystal never make any representation I front of any third party or
outsider through which it was made clear that Sam and John are not permitted to make contracts
beyond $15,000. Thus, by nit making any representation, a conduct is incurred by Crystal which
has ostensibly granted authority to Sam.
Thus, the contract that is made by Sam is within his ostensible authority and thus the said
contract is valid in nature and will bind Crystal by the same. So there is a valid contract amid
Crystal and Elite.

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Reference List
Books/Article/Journals
Adams, M 1997, Australian Essential Management Law, Routledge.
Chapple, L and Lipton, P, 2002, Corporate Authority and Dealings with Officers and Agents,
CCH Australia and Centre for Corporate Law and Securities Regulation, Faculty of Law, the
University of Melbourne.
Hocking, B 1999, Liability for negligent words, Sydney: Federation Press 1999.
Latimer, P 2012, Australian Business Law 2012, CCH Australia Limited.
Case Laws
Australia and New Zealand Bank Ltd v Ateliers de Construction Electriques de Charleroi [1976]
1 AC 86
Candler v Crane, Christmas & Co [1951];
Caparo Industries PLC v Dickman [1990] UKHL 2;
Crabtree-Vickers PL v Australia Direct Mail Advertising &Co PL (1975) 133 CLR 72
Donoghue v. Stevenson [1932].
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964];
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964);
Hill v Van Erp - [1997] HCA 9.
Karrawirra Wines v State Bank of South Australia [1994].
Maynegrain Pty Ltd v Compafina Bank, [1982].
Mutual Life and Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 566.

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Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971].
Shaddock& Associates Pty Ltd V Parramatta City Council [1981] HCA 59.
San Sebastian Pty Ltd V Minister Adminstering The Enviromental Planning And Assessment Act
(1986).
South Australia Asset Management Corp v York Montague Ltd, [1997] 1 A.C. 191 HL.