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"There Is No Point Reforming the Rules on Auditors If the Liability Regime Continues to Be as Lax as It Currently Is." Discuss.

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"There is no point reforming the rules on auditors if the liability regime continues to be as lax as it currently is." Discuss.

Auditors provide a key investigation function in the business world. The law in relation to the liability of auditors changed significantly with the introduction of Companies Act 2006. It is now possible for audit firms to limit their liability towards clients through contractual agreements. The current auditing liability regime has proven to be controversial. This essay will first present the relevant liability rules and examine the underlying problems, then evaluating the significance of these rules with regard to auditing reforming.

Overall, an auditor can be liable either in contractual, tortious or criminal circumstances. Each of these areas will be discussed in turn.

I. Contractual Liability

There is usually a contract that exists between the audit company and its client which gives rise to a contractual relationship and its surrounding duties. If an auditor does not exercise reasonable care and skill, the client company will be able to claim for damages for any loss arising from the situation. The auditor’s implied contractual duty of care is owed to the company and not to individual members as the contract is formed with the company as a separate legal person. The role of auditor is to “ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that.” To discharge this duty fully, basic check of the accounts is needed; some form of enquiry would be required as well. While the standards required in relation to contractual liability are increasing, if an auditor is methodical and meticulous in his investigations it seems unlikely that the courts would be willing to find him liable.

II. Tortious Liability and Claims by third parties
Considerable discussions…...

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