Auditors and Legal Liability: A Case Study Analysis

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AUDITORS AND LEGAL LIABILITY
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Executive summary
Audit is an important financial term. The term audit included investigation process of an
organization. However, there are two different types of investigation process under the audit
program. These two types are external and internal investigation of financial instruments. The
definition of audit includes different accounting standard that covers every financial aspect.
However, the study in this assignment is related with evaluation of different financial terms from
legal point of view. The standard of accounting standard related with the ethical codes of
business law. After evaluating the accounting standards, it became clear that different topic of
finance covers by different codes. Simultaneously, in this assignment, it is ask to relate a case
study with report of audit. It could be noted that for this assignment the selected case is RBC vs
Bannerman. However, it became clear that the audit program plays an important role behind a
proper business activity. The every activity of an audit program is comes under the boundaries of
accounting standard. On the other hands, it could also be observed that an audit program is
always enforceable by law. For example, a prior investigation process includes issuance of
permission letter. This letter of issue includes different subjects or topic that comes under
disclaimer of an audit program.
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Table of Contents
1.0 Introduction................................................................................................................................4
2.0 Findings.....................................................................................................................................4
2.1 Brief description.....................................................................................................................4
2.2 Some reasons for culpability..................................................................................................5
2.3 Basic issues in Auditing and Accounting case.......................................................................6
2.4 Main cause behind the issues.................................................................................................7
2.5 Mistakes done by defendants.................................................................................................8
2.6 Recommendation...................................................................................................................9
3.0 Conclusion...............................................................................................................................10
Reference list.................................................................................................................................11
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1.0 Introduction
An organization consists of some of the important and majorly playing roles officials which do
play an important role and responsible for the rise or downfall of an organization. However in
this commuting world consists of numerous organizations it became a tough point to emerge as
one of the best but there are many, does the sequence perfectly and standing at the top. In this
project, the studies and the discussion will be based upon the Auditors and Legal Liability. Now
on a short let’s put light on the roles that auditors and liability play within an organization. In an
organization, there are several officials, auditor, and client management, the board of directors,
shareholders and third parties. Basically, the client management prepares the financial statement.
And the role of the auditor is to check what management does, and the board of directors acts as
an oversight. There is a contract between the auditor and the board of directors in the form of an
engagement letter, so they carry a real relationship within them. The auditor owes shareholders a
duty of care under the torn of negligence. These third parties use the financial statement and
audit report to make a decision wheatear it is false or it is true. So in this project study will show
the issues in accounting and auditing cases and throws lights on the mistakes made by the
defendants. This project also provides justification regarding the appropriateness of the case.
2.0 Findings
2.1 Brief description
The brief discussion points out all of the factors in regard to the case study. The project puts a
light in the auditing and the legal liabilities which means the particular terms which are related
with the financial factors and which also holds the origin factors of an organization and the
processing system on which the teams are working. The working of auditors, the board of
directors, client management and the third party is familiar, and this description reflects the case
study in relating with all of these characters in terms of their roles in this project. The character
in an accountancy farm is considered as defenders or defendants. During the period of time when
the materialistic process is taking place, at that time the limited auditors were the APCs. At this
time APC and APC civil limited hold the entire amount of the subsidiary. Chaos broke out in the
organization in regarding that particular event which faced tremendous losses. Huge and
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innumerable damage has been raised by the pursuer in against of the legal defenders in respect of
that particular event which occurred previously and in two parts the ground action has been
divided. Duty of care came under the torn of negligence that came in focus. The duty of care put
in against of the defenders, APC and the auditors by the pursuer. Well, however, the pursuer and
the investors also faced a huge loss in this process. It is the belief of the pursuer that the matter
happens due to the character named McMahon frauds, who was the financial controller of APC
during that period of time. The whole phenomenon results in against the defenders who turned as
liable and imposters in regard to all the odds that happen.
2.2 Some reasons for culpability
The word culpability comes from the Latin word “culpa” which means fault. Culpability defines
a person culpable if he or she is equally responsible for any kind of cruel intention or happenings
within a system. Culpability also points out some of the dividing lines between evil and
randomly occurring events. Evil intention like anything that is cruel and violation the laws of the
constitution, which held a person directly responsible and randomly occurring events like
tsunami earthquake flood, in which human beings cannot be responsible. A person can be held
culpable on the term of causing evil impact. If it’s done intentionally, the consequences and the
happenings could be controlled and the person who is responsible for the culpability executes no
action against the charges. There are many cases in which the details of charges on culpability
have been discussed. However, let’s puts focus on some of the reasons for culpability.
There were several reasons which encourage the falseness and give the proof of the culpability or
beings within the system. However, the pursuer has been concluded with a total number of four
different values that are necessary to be paid by the defenders. The given sums are £12,016,000;
£1,947,000; £7,116,000 and £12,016,000. It was stated as per of Article 2 which has been
claimed by the pursuer around the date on 11 October 1995 along the including of the APC has
been made. And again as per the patronizing official an article comes up as Article 3, which
stated and gave direct charges that APC’s joint receiver has been appointed by the same pursuer
on the year 24th September 1998. Four days later the same pursuer has been appointed a similar
individual as the civil joint receiver. After that, it leads into a brief alongside argument resulted
in the formation of appointment happenings several time by the receivers. But the matter of fact
is that the whole phenomenon does not bring any changes into the process, as a result, nothing
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changed. After a frequent moment, Bannerman Johnstone Maclay has been considering as
successful in regrinding of the rise of strikes for the sake of their own aspect, at the end of 1995
one of the staff members of Bannerman Johnstone Maclay joined APC as a controller of the
financial process. After a period of time it comes in point that as per the patronizing officials the
Article 4, it stated that the auditing which has been done has been completed by the defenders
and it is also claimed that it has not been disclosing that the civil accounts have too audited by
them only, that is by the defender. Basically the claim has been drop that the accounts of the
APC has been audited by the defenders around the time of 30th November 1995 to 31st
November 1997, which also gives the detailed description about the fact that the time period was
unqualified type which has been signed by the defenders on around 16th April 1996 to 15th
January 1998. After that, it has been also been claimed that the defenders will finalize the course
of the APC account from 31st March 1998. According to Brooks et al. (2017), it points out that
particularly that it was the time when the selection of the receivers was happening and the
accounts in regarding of that particular time have already drop in the draft by them.
2.3 Basic issues in Auditing and Accounting case
There are big issues that occurred during the process resulted in the formation of the total
frankness in accounting as well as the auditing cases. APC mainly compose of a shareholder of
two types one is Mr. Robinson and Mrs. Clow. After that in further, it extends in addition to
another shareholder from 1996 in the month of October. The investors had put a ton of money in
the process of APC, around the time between August 1997 and October 1996. Around the end of
the year 1995, one of the members of Bannerman Johnstone Maclay was appointed as the
controller of the financial factors by APC. The Royal Bank of Scotland rose with a claimed that
the time period which has been given by them to the APC is overly violating as they were
irregular and irresponsive in accordance with their words in regarding of the financial matters
which results in the fraud of the whole matter and the destruction of the organization and their
functions. According to the Matonti et al. (2016), it stated that Bannerman Johnstone Maclay has
been claimed with liable vicariously in regard of the fraud which has been done.
The statement was given by the jury in against of this issue regarding the accounting and
auditing case that APC had enough control leaning direction in respect to the kinds of stuff for
the second time. It also stated that the payments were continuously made by Bannerman
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Johnstone Maclay. In this manner, the stuff tends to become a member of the management of
APC. As stated by Doxey et al. (2016), it happens with the support of the Board of Directors
who holds every right to run this operation.
2.4 Main cause behind the issues
The limited leaders of APC were The Royal Bank of Scotland (RBS). In the industry of
construction, the APC limited is the hirer of the plant. A facility letter of RBS is really that
required and necessary which provided them by the APC on the regard to the statement of
finance which audited within a half year on the bottom of the financial year. BMJ (Bannerman
Johnstone Maclay), the auditor of APC provided with a clear option on the regard of the account
for the time period, ended 1995, 30th November and 1997 31st March. The addition of this
account were cleared RBS by APC, which contended that they have no issue on trusting on RBS
and allow them to be fit for more loans to APC and could collect stakes of equity in the
corporates. On regarding the business, the receivers were appointed by the RBS while
Bannerman Johnstone Maclay was busy in performing on further accounts audits in the month of
September in the year 1998. After the failed effort made by the investors for the recovery of the
loans and investments, a procedure was started by the team of RBS on the against of Bannerman
Johnstone Maclay, the account was banned and also considered to be false or incorrect and also
made the ignorance Bannerman Johnstone Maclay’s audit. Not only that, but it also stated that
Bannerman Johnstone Maclay owed RBS, the duty of care on the following factors.
1. In APC’s personal affairs of finance, Bannerman Johnstone Maclay was charged to be
involved as per Ghosh and Tang (2015), and it pronounced as the working of cash hunger type
and the capital of their working supported by RBS.
2. Some of the facts could also be predicted that for the consideration purpose whether
Bannerman Johnstone Maclay collects the copies of facility letters of the Royal Bank of Scotland
which was an ongoing concern of APC. From there it would be possible to look after the
necessities that the audit of the account provided.
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3. It could be possible that Bannerman Johnstone Maclay knows the top end to bottom about
the Royal Bank of Scotland, which made it really possible to go as per the auditing record and
could hold upon the financial management
A report has been made that Bannerman Johnstone Maclay also tried to claim a strike on the
basis of the fact that Royal Bank of Scotland’s charges was not enough to be given the duty of
care.
2.5 Mistakes done by defendants
It could be noted that the decision related to this case study is unsatisfactory up to some extent.
However, the process of further testing could be required for this case. The points that weaken
the case of RBS (Royal Bank of Scotland) could be the presence of actual sufficient knowledge
of BJM in place of proposed reliable knowledge of RBS. The argument related to this point is
possibly due to the limitations stroke out in the application. According to the opinion of Simunic
et al. (2017), there is no doubt that it could be hard for BJM related to the decision behind the
selection of RBS as a fund provider. Apart from this, the concerned organization does not have
any idea whether the report of audit could be presented to them or not. However, the decision is
one kind of warning related to audit program, which could still arise claims. As per the reports of
other organizations, it could be concluded that the auditors could not have the authority to force
for claim exposure. This exposure could be done by the bank. A legal notice should be furnished
with the proposal for exposure of an audit report. According to Wilson, (2015), this could be the
situation to issue a letter of disclaimer and response to the accounting standard. As per the
present scenario of this case, the RBS did not contacted BJM to notice the reliable intensions. On
the other hands, it could be observed that moving ahead and kept the trust related to accounting
reliability, on the private objects of organizational performance that only knowledge to BJM not
for outsiders.
It could be noted that a safe route must be provide a standard disclaimer of audit work that could
be related to every lender. This process of disclaimer brought the awareness related to the
necessity of an audit program for an organization. Simultaneously, the application of this thought
process deemed to be onerous and impractical. On the other hands, a possibility related to the
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standard disclaimer of amalgamation related to the entire audit report. The other most important
thing is related with the responsibility of third party. Under the standards of accounting, it is
stated that the existence of third party does not considered by an auditor unless and until no
written evidence is received in respect of that. As per different section an auditor could entertain
different authority but topic of liability restriction whether fallen any section or not. Apart from
this, this topic blocks an audit or not is also an important point of concern.
2.6 Recommendation
According to the instructions given under this case study the major issue is related with the threat
that was pointing out towards an auditor. However, this threat is related with the activity of third
party involvement resultant into organizational losses. It could be observed that any law or
accounting standard does not allow a bank to approach an auditor. For this reason an auditor
does not carry any factor of risk related to claim. Simultaneously, it could be observed that the
standard of accounting provide professionalism. Different powers have been provided to an
auditor under accounting standard. Under the profession of an auditor, they do not afraid of risk
related factors. In this assignment all the activity is fallen under the category of standard of
accounts. However, the discussion also included the role of an auditor, analyses of different
standard of audit and area of audit report. Apart from this, in this assignment the prior initial
steps are also discussed. According to the accounting standards, it is clear that a disclaimer letter
is necessary to issue for the before starting the investigation process of a audit program.
However, this letter should be provided to that organization in which the program of audit is
going to be conducted. Under this accounting standard the every activity of an auditor is comes
under the jurisdiction of law. The performance of an auditor is always bounded by legal aspects.
It could be noted that after the issuance of letter of disclaimer, the auditor should proceed for his
investigation trial.
As per the ACCA council, no need to enclose the letter of disclaimer before conducting audit
program. However, this could act in negative way for a proper audit program and this conclusion
is considered by many other peoples. As per the mentioned council the important thing is related
with the disclaimer of organizational staffs of any organization. This disclaimer deals with the
responsibilities associated with a staff of an organization. It could be observed that this
disclaimer does not relate with the utilization purpose. Simultaneously, ACCA does not follow
this if the performance of audit is correct.
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3.0 Conclusion
The organizing community is in a threat due to the working and falseness of the people. There is
a huge amount of capital exchanging within the organization and some of the fake workings of
the people within an organization posing a huge amount of losses and suffer to the investors as
well as the organization. There is a rising litigation trend which is costing the profession of audit
billions of capital. So in this project, it stated the falseness of auto and its behavior against the
victimized organization. The project puts light on the brief discussion of auditing and legal
liability. Also through lights on the reason of culpability, the most commons and basic factors a
being culpable. Some of the issues occur in the accounting and auditing cases and one of the
major factors causing the issues. Also, it reflects the mistakes made by the defenders in
accordance with the auditing and the legal process. However not it can be assumed that this sort
of deed is not appropriate toward the current trend to be practice and also which pose a serious
threat to the world of business.
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Reference list
Journals
 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.
 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.
 Brody, R.G., Haynes, C.M. and White, C.G., 2015. Is PCAOB standard no. 5 impairing
auditor objectivity?. Current Issues in Auditing, 9(2), pp.C1-C7.
 Brooks, L.L.Z., Cheng, C.A., Johnston, J.A. and Reichelt, K.J., 2017. Estimates of
optimal audit firm tenure across different legal regimes. Journal of Accounting, Auditing
& Finance, 32(1), pp.3-39.
 Doxey, M.M., Fuller, S.H., Geiger, M.A., Gist, W.E., Hackenbrack, K.E., Janvrin, D.J.,
Pitman, M.K. and Roush, P.B., 2016. Comments by the Auditing Standards Committee of
the Auditing Section of the American Accounting Association on PCAOB Release No.
2016-003, Proposed Auditing Standard—The Auditor's Report on an Audit of Financial
Statements when the Auditor Expresses an Unqualified Opinion and Related
Amendments to PCAOB Standards. Current Issues in Auditing, 11(1), pp.C26-C40.
 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., 2015. Early evidence on the effects of
critical audit matters on auditor liability. Current Issues in Auditing, 10(1), pp.A24-A33.
 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.
 Grenier, J.H., Reffett, A., Simon, C.A. and Warne, R.C., 2017. Researching juror
judgment and decision making in cases of alleged auditor negligence: A toolkit for new
scholars. Behavioral Research in Accounting, 30(1), pp.99-110.
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 He, K., Pan, X. and Tian, G., 2017. Legal liability, government intervention, and auditor
behavior: Evidence from structural reform of audit firms in China. European accounting
review, 26(1), pp.61-95.
 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.
 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.
 Matonti, G., Tucker, J. and Tommasetti, A., 2016. Auditor choice in Italian non-listed
firms. Managerial Auditing Journal, 31(4/5), pp.458-491.
 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.
 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.
 Simunic, D.A., Ye, M. and Zhang, P., 2017. The joint effects of multiple legal system
characteristics on auditing standards and auditor behavior. Contemporary Accounting
Research, 34(1), pp.7-38.
 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.
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