Commercial and Corporation Law Project 2022

RUNNING HEAD: COMMERCIAL AND CORPORATION LAW
Commercial and
Corporation Law

COMMERCIAL AND CORPORATION LAW
Liabilities of Auditor against third parties
Introduction
Concerns about auditor’s legal responsibility remain to develop daily. Auditors are very
significant individuals because they are eventually accountable for improving the accuracy of
financial statements for all types of internal customers. Like other experts, in carrying out
their responsibilities, they can experience civil and criminal liability. In this project, the
liabilities of the auditor against the third parties will be defined along with the case laws
relating to it.
Liabilities of Auditor against the third party
Auditor liability is an increasingly important area, especially in view of the shifting and
widening of audit commitments in Australia.1 Auditors are currently subject to a extensive
variety of legislations scaling from contract law to common law and statute. The act of
accountants and auditors is regulated by numerous professional institute, such as the Institute
of Chartered Accountants in Australia (ICAA) and CPA Australia, through the provision of
norms and guidelines. Apart from these agencies, some governmental agencies also govern
the auditing profession like Australian Securities and Investment Commission (ASIC) and
Australian Competition and Consumer Commission (ACCC).
It is usually understood that auditors are accountable to two types of third parties: firstly
recognized users of the accounts and secondly, a restricted category of predictable users who
depend on the accounts.2 Known users of the accounts are the real shareholders and the
company's creditors. The business usually retains by name a complete list of all these people.3
The second group of predictable users’ needs some judgment. The first and foremost duty of
the auditor against the third party is obligation of due care and diligence as stated in the case
of Re Kingston Cotton Mill Co.4 An obligation of care and skill is levied on the auditor while
auditing a company’s fiscal statements. In the case of Mutual Life and Citizen’s Assurance
Co Ltd v Evatt5, it was noted by the court that there has been a close relationship where the
1 Enshen Li, Business and Corporate Law Guidebook (Thomson Reuters, 2018)
2 Paul Latimer, Australian Business Law (CCH Australia LTD,2014)
3 Lipton & Herzberg, Understanding Company Law (Thomson Law Book, 2013)
4 (No.2) (1896) 2 Ch 279
5 (1968) 122 CLR 556
1