Liability of Auditor and Law of Agency

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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)