The liabilities of Auditors of a company can be studied under following heads:

a) Civil Liabilities

Civil liabilities mean the disputes over losses caused to one party by acts of another. The civil liabilities of an Auditor can be for:-

i) Negligence ii) Misfeasance

- i) Liability for Negligence (under law of agency)

Auditor being agent of the Shareholders is required to carry out his duties with reasonable care and skill. If he fails to do so, he is Liable to make good any loss caused to the third party.

Major legal decision

1) Arthur E. Green & Company Vs Central Advance & Discount Corporation Ltd. 1920: It was Held that auditor is guilty of negligence. Auditor accepted the schedule of bad debts furnished by the client, though it was apparent that debts were not recoverable.

2) The London Oil Storage Co. Ltd. Vs Sear Hasluck & Co: In this case, auditors were held liable for negligence. Auditors failed to verify the physical existence of cash in hand. Cash balance as per books did not agree with the physical balance, the difference was misappropriated by the cashier.

3) Irish Woolen Co. Ltd. Vs Tyson and Others: In this case auditors were held liable for negligence. Profits were overstated by not recording purchase invoices. He was held liable for having failed to exercise reasonable care and skill.

4) Kingston Cotton Mills Co. Ltd: In this case auditors were not held liable for negligence. It was held that it is not the duty of auditors to take stock, if they accept certificate in the absence of any suspicion, he has carried out reasonable care and skill.

5) In Mckesson V Robbins (American case): It was held that it was duty of auditors to test check the physical stock.

Conclusion:

Auditors should inspect securities, test check stock wherever it is practicable and where it is not he should state in his report that he has accepted a certificate. In the light of Part-A of Addendum to ISA-8, “Attendance at Physical Inventory Counting” and SAP - 3 “Verification of Inventories”, the position of auditors as held in Kingston Cotton Mills Co. Ltd. is no longer valid.

- ii) Liability for Misfeasance

The term misfeasance means breach of duty. If auditor does something wrong in the performance of his duties resulting in a financial loss to the company, he is guilty of misfeasance. For example auditor’s duties are laid down in section 255 of the Companies Ordinance, 1984. If auditor does not perform his duties properly and the company suffers loss he is liable for misfeasance.

Major Case Laws

1) London and General Bank Ltd: In this case auditors were held liable for misfeasance. The auditors failed to report that Balance Sheet was not properly drawn:-

Large sums were advanced to the customers and interest thereon was accrued, in fact neither advance nor accrued interest was receivable. No provision for bad debts was made and the company paid dividend.

2) Under section 260 of the Companies Ordinance: 1984 if the auditors fail to report to the members material misstatement of facts or give untrue picture to the members, and the default is willful, auditors shall be punishable with fine which may extend to two thousand rupees.

b) Criminal Liabilities

Section
260

If auditor fails to comply with the requirements of sections 157, 255 or 257, he shall be punishable with fine up to Rs. 100,000/-. If he knowingly makes a false report for profit to himself or to put another person to a disadvantage or loss for a material consideration, he shall also be punishable with imprisonment for a period of one year.

417

If charges of forgery are brought against an auditor, he may be liable to imprisonment for a term which may be extended to 2 years or fine up to Rs. 20,000 or both.

492

If in any report the auditor makes a false statement he shall be liable to imprisonment for a term up to 3 years and a fine not exceeding Rs. 20,000.