Auditors and Legal Liability: A Case Study Analysis for HI6026

This report examines the legal liabilities of auditors, focusing on the case of Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay (2002). The analysis explores the key events, responsible parties, and relevant accounting and auditing issues highlighted in the case. It discusses the problems, mistakes, and misrepresentations made by the defendants, including negligence and misstatements in financial reporting. The report provides recommendations for audit strategy, including incorporating liability clauses and enhancing audit programs. Furthermore, it suggests effective measures for auditors, such as improving internal evaluation methods, enhancing skills, and presenting financial data in accordance with auditing standards to ensure the accuracy and reliability of financial statements. The conclusion emphasizes the importance of auditors improving their skills and potential liabilities so that clients can rely more on their reports and financial statements for decision-making.

Auditors and Legal
Liability
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1. Introduction:
• The auditors are deemed to be highly
significant individuals, since they bear the
responsibility to improve the reliability of
the financial statements for all types of
external users (Anantharaman, Pittman
and Wans 2016).
• It is necessary for the auditors to have
the required skills and integrity at the
time of auditing “the operating
statements” of the trading organisations.
• The paperwould evaluate the case of
“Royal Bank of Scotland (RBS) v
Bannerman Johnstone MacLay
(Bannerman) (2002)”

2. Brief description of key events
and factual issues behind the
case:
• “RBS” has professed that they have
bemused over “£13 million” in outstanding
draft aptitudes to the “bankrupt user”, which
is “APC Limited”.
• The main lender or banker of the
organisation was RBS and with the passage
of time, it had exercised options in order to
subscribe for maximum shares of the
organisation.
• APC enjoyed the financial facilities as well
as rebates based on the audit statement of
Bannerman.
• It has been found that the disclaimers
mentioned in the policies might not eliminate
the liability; however, it could eliminate the
scope of assuming the liability to the same
for the courts (Aobdia and Shroff 2017).

3. Responsible parties of the case and
evaluation of the appropriateness of
damages or penalties imposed:
• According to RBS, the auditors needed to
owe a duty of care, which was violated at
the time of negligent auditing of accounts
and as a result, the bank encountered
significant loss.
• In contrast to the debates laid down by
the “actuaries”, the bank was not needed
to reveal that the “accountants” wanted
the bank for relying on the “reports” for a
specific reason, it was adequate that the
“clerks” was probable to conduct the same.
• Therefore, the forum pursued a clean
authority “guideline” regrading the
requirement of no such goal. Hence, the
culpable parties in this case were the
auditors of RBS.

4. Investigation and explanation of
the relevant issues in accounting and
auditing highlighted in the case:
• The rising price to the business, initially
from protecting and resolving assertions
along with draping coverage choices
• The probability for subsequent rise in
examination charges in order to envelope
the increasing prices (Chi and Weng 2014)
• The comprehensive unavailability of
adequate coverage enveloped in the
industry compared to the volume of few of
the assertions
• The absence of rivalry in the analytical
“market” for huge and enlisted
organisations

misrepresentations made by the
defendants:
• Mr Hanretty was the jumior counsel for the defenders
and the individual opened this aspect of debate by
submitting the dependence of the prevalence of
obligation of supervision on the following factors:
• On the damage foreseeability that the pursuers
suffered owing to the consequence of reliance on the
negligent misstatements of the defenders
• On the presence of proximity or neighbourhood
relationship between the defenders in the form of
information providers and the pursuers as its receipient
• On being just, fair and reasonable in the circumstances
that such duty needs to be imposed on the defenders
(Scotcourts.gov.uk 2019)
• However, these claims do not hold true because like
organisations or individuals, the “actuaries are
constrained by rules” in the nations where they
“practice” (Kadous and Mercer 2014). Therefore, in
accordance with the existing criminal law, there could
be prosecution for the auditors like insider trading and
fraud.

6. Problems, mistakes or
misrepresentations made by the
defendants:
• Liability of negligence, in which the auditors are
accountable for the negligent actions when they did not
carry out their duties carefully, which could result in loss
for the organisation in the form of loss of the financial
position.
• Responsibility of the “minor parties” where the “third
forces” like the stockholders, bankers, government,
shareholders, levy commands and trade investigators
rely on the reports of the auditors.
• Domestic and offenders felony accountabilities where
the auditors are accountable for incurring the
impairments occurred from criminal and local “felony”
functionalities.
• Misstatement in prospectus, in which the auditors owe
the responsibility to incur the damages occurring from
the misstatement in announcements.
• Accountability of proficient wrongdoing and distortions
where the auditors are accountable for the professional
cipher of ethics along with correct representation of the
financial statements for depicting the real overview of
the “financial status”of the organisation.

7. Recommendations:
7.1 Audit strategy:
• With the increasing burden of minimising audit fees,
it is not probable that the organisations would intend
to perform to the extent of rise in the price besides
there is a perception that such activity would result in
“longstanding” minimisations in insurance and legal
expenses.
• The solitary results of the “Bannerman case” was
the possible vulnerability of the “actuaries” to
“lawsuit” from the external forces where no liability
disclosures were made. Therefore, it is necessary to
incorporate a clause of responsibility to the “minor
parties” in the audit report statements (Philipsen
2014).
• Moreover, the “reviewers” of the “Bannerman case”
feel that the disclaimer acts in the form of an
impediment to “lawsuit”, which minimises the burden
of “carrying-out” sound quality audits in the initial
phase. Hence, it reduces the analysed declarations
credibility noticeable to the users and hence, it has to
be accompanied by other audit programs.

7. Recommendations:
7.2 Audit program:
• The auditors have obtained the permission in
accordance with the Companies Act to utilise
liability limitation agreements since 2008. The
objective is to minimise the litigation threat from
the clients (Simunic, Ye and Zhang 2015).
• The shareholders are required approving these
agreements yearly and they have to be upheld by
judges in the form of fair and reasonable when
situations take place.
• However, both the audit strategy and audit
program have to be supported by other effective
measures for dealing with the threat to litigation
appropriately.

7. Recommendations:
7.3 Other effective measures:
• The auditors need to have sufficient grip on the
interior evaluating method of the organisation by
developing and depicting the “operating
statements” accurately and appropriately
(Tepalagul and Lin 2015).
• The auditors have to improve their skills as well as
potential liabilities so that the clients could rely
more on their reports as well as evaluated “profit
and loss statements”, that are precise, unbiased
and pertinent for the decision-makers.
• Auditors are required expressing their potential
liabilities by offering a judgement on the accuracy
of accounting and “monetary grades”for gaining
assurance of the individuals. Therefore, the audit
reports and financial data have to be presented by
adhering to the prevailing auditing and accounting
standards (Wilson 2015).

8. CONCLUSION:
• According to RBS, owing to fraud, the accounts of
the past years had resulted in misstatement of the
actual financial position of the organisation and
negligence was identified from the end of the
defendants in not identifying the same.
• According to the defenders of the auditors of RBS,
there was absence of relevant statement of the
“prevalence of obligation to supervision” that the
accused have owed to the pursuers for auditing the
accounts of APC.
• However, these claims do not hold true because
like organisations or individuals, the “actuaries are
constrained to rules” in the nations where they
“practice”.
• Therefore, the auditors have to improve their skills
as well as potential liabilities so that the clients
could rely more on their reports as well as evaluated
“profit and loss statements”, that are appropriate,
unbiased and pertinent for the “administrators”.

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