ACCG340 Study Guide - Final Guide: Australian Consumer Law, Contributory Negligence, Professional Ethics
19 Jun 2018
School
Department
Course
Professor
WK 10
Auditors’ legal liability – MCs
1. There are five ways that an auditor can suffer a legal sanction:
a. Breaches of the
Crimes Act
b. Breaches of the
Corporations Act
c. Breach of contract
d. Tort of negligence
e. Breaches of the Australian Consumer Law (ACL)
2. Negligence
a. Any conduct which is careless or unintentional in nature and entails a breach of any
contractual duty or duty of care in tort owed to another person or persons.
b. Elements the plaintiff must prove:
i.
duty was owed
to a plaintiff by the defendant;
ii. a
breach
of the duty of care (negligent conduct occurred);
iii. loss or
damage was suffered
by plaintiff; and
iv. that a c
ausal relationship
existed between breach of the duty by the defendant and
harm suffered by the plaintiff.
3. Reasonable care and skill
a. Auditor must exercise reasonable care and skill expected of a professional.
b. Requires adherence to professional standards in all aspects of an audit.
c. “The professional man owes a duty to exercise that standard of skill and care appropriate
to his professional status.” (Caparo, 1990)
4. MC -Liability to clients:
Pacific Acceptance
case
( ‘reasonable care and skill’/ Duties and responsibilities for clients means for an auditor)
Pacific Acceptance Corporation Ltd v Forsyth
(1970) provides exposition of auditor’s duties
and responsibilities:
a. duty to use reasonable care and skill (ASA 200)
b. duty to check and see for themself (ASA 330; ISA/ASA 500)
c. appropriately supervise and review (ASA 220)
d. properly document procedures (ASA 230)
e. reliance can be placed on internal controls (ASA 315; IASA 330)
f. duty to warn and inform appropriate level of management; ASA 260
g. duty to take further action where suspicion is aroused; ASA 240
h. expectation of discovering material error or fraud; ASA 240
5. MC - Contributory negligence:
AWA
case
a. Exists where the plaintiff fails to exercise the required standard of care, thus
contributing to its own loss. Prior to
AWA
, such a defence by auditors was unsuccessful
b.
AWA Ltd v Daniels t/a Deloitte Haskins
(1992)
i. Losses suffered by company due to internal control weaknesses over foreign exchange
ii. Auditor liable for failure to report to board of directors
iii. Company contributed to loss by officers not reporting to board of directors and
failure to put in place adequate internal control system
6. MC - Liability to third parties:
Esanda
case
：
a. A number of cases have considered the auditor’s liability in relation to persons other
than the immediate client (third parties) eg Caparo, AGC, Columbia Coffee.
b. Must now establish a reasonable degree of foreseeability and proximity between the third
party and the auditor
c.
Esanda Finance Corporation v Peat Marwick Hungerfords
(1997) provides the current test:
i. whether statement by the auditor was meant to induce the third party to undertake
specific actions
ii. would be hard to show that audits on general purpose financial reports were ever
intended to induce third parties to undertake a specific course of action
iii. it is now very HARD for third parties to sue auditors for negligence
d.
To owe a duty of care
the following would have to be established according
the judgement in Esanda Finance
i. The report was prepared on the basis that it would be conveyed to a 3rd party
ii. The report would be conveyed for a purpose that was likely to be relied
upon by that third party.
iii. The third party would be likely to act in reliance on that report, thus
running the risk of suffering the loss if the statement was negligently
prepared.
7. MC - Liability to third parties: Privity letters
a. Third party requests a privity letter from the auditor to acknowledge the third party’s
reliance on the audited report
i. privity letter serves to establish a relationship with the required foreseeability
and proximity and thereby establish a duty of care by the auditor to the third party
ii. AGS 1014 provides guidance
8. MC - Liability to third parties: Australian Consumer Law
a. Consideration needs to be given to the provisions of the Australian Consumer Law (ACL)
set out in Sch 2 of the Competition and Consumer Act 2010:
i. Chapter 2 s 18 of the ACL prohibits misleading and deceptive conduct
ii. It is possible that in issuing an
inappropriate audit report
, auditor is guilty of
conduct which was
misleading or deceptive
9. MC - Liability to third parties: ASIC Act
a. Under s 50 of the ASIC Act, proceedings for damages to the
public interest
can be initiated
by ASIC
b. In 2008 ASIC utilised this power by commencing action against KPMG for $200 million
over the collapse of the Westpoint Group
Professional ethics and auditor independence
1. Purpose of Code of Ethics
a. Ethics requires knowledge of moral principles and skills in applying them to problems
and decisions.
b. A Code of Ethics provides a formal, systematic statement of rules and principles developed
by a community to promote its wellbeing and punish undermining behaviour
i. makes explicit the values implicitly required
ii. indicates how members should act towards one another
iii. provides basis for sanctions
2. Code of Ethics for Professional Accountants (APES 110)
a. Mandatory for all members and failure to observe code can result in disciplinary
procedures
b. Members are expected to comply with the spirit as well as the letter of the code
c. Code is in three parts:
i. Part A: fundamental principles and conceptual framework
ii. Parts B and C: illustrate application of conceptual framework to specific situations:
1. Part B: Members in Public Practice
2. Part C: Members in Business
3. APES 110: Part A Section 100: Fundamental Principles
a. All accountants should have the following characteristics:
i.
Integrity
=
straightforward and honest
in all professional and business relationships
ii.
Objectivity
=
not allow bias, conflicts of interest
or the undue influence of others
to compromise their professional or business judgement
iii.
professional competence and due care
=
maintain professional
knowledge
and skill
under a required level of professional
iv.
confidentiality
=
not disclose
to others without permission &
not take personal
advantage
for themselves or 3rd parties
v.
professional behaviour
= comply with relevant
laws
and regulations and shall avoid
any action that may discredit the profession
b. Specific guidance on independence requirements for assurance engagements provided in
APES 110 s290 and the relevant corporate legislation (Corporations Act 2001 in
Australia).
c. Evaluate any threats (and their significance) to compliance with fundamental principles
d. Existence / implementation of appropriate safeguards
4. APES 110: Code of Ethics for Professional Accountants
a. Categories of threats (APES 110.12)
i.
Self-interest
threats e.g. direct financial interest in the client
ii.
Self-review
threats; preparation of records for the client.
iii.
Advocacy
threats; e.g. dealing in shares or other securities in an assurance client.
iv.
Familiarity
threats; e.g. a member of the assurance team having an immediate or close
family member who is a director or significant employee of the assurance client.
v.
Intimidation
threats; e.g. threat of replacement over a disagreement, pressure to
reduce extent of work to reduce fees.
b. Safeguards created by the profession, legislation or regulation include (IESBA Code/APES
100.14):
Document Summary
Prior to awa, such a defence by auditors was unsuccessful: awa ltd v daniels t/a deloitte haskins (1992) Losses suffered by company due to internal control weaknesses over foreign exchange. Auditor liable for failure to report to board of directors. The report was prepared on the basis that it would be conveyed to a 3rd party. The report would be conveyed for a purpose that was likely to be relied upon by that third party. Chapter 2 s 18 of the acl prohibits misleading and deceptive conduct. Parts b and c: illustrate application of conceptual framework to specific situations: part b: members in public practice, part c: members in business, apes 110: part a section 100: fundamental principles, all accountants should have the following characteristics: Integrity = straightforward and honest in all professional and business relationships. Apes 110 s290 and the relevant corporate legislation (corporations act 2001 in.
