Auditors accumulate and evaluate information to be able to determine whether the financial reports of a given company complied with legislative requirements and established criteria. An auditor therefore determines the credibility of financial information so that the correct use of it in business and investment decisions can be made. Auditors have legal duties attached to their activities which they are expected to uphold. A breach of the legal duty which is imposed and fixed by law due to careless acts constitutes what is termed as negligence (Basu, 2010). This makes it to be based on conduct rather than any form of agreement. A tort of negligence therefore is only committed when actionable damage is sustained, and this is not only by carelessness but by inflicting damage carelessly in situations where the law recognizes a duty to be careful. Negligence is hence established if the conduct was careless and there existed a causal relationship between the damage and that conduct. A close look at it is a situation where the conduct was foreseeable to inflict the damage on person harmed.
Negligence statements provided by company auditors can result to pure economic loss. Internal auditors check the accuracy of the financial information and provide an opinion whether the information is true and fair according to the accounting standards and common law. They are liable to external users of financial information since external users rely on audited statements to make investment decisions hence the need of the opinions to be unbiased and remain independent. Therefore, it is their legal duty to provide an assurance to all audited statements users that the material is not of fraud, its reliable and lacks irregularities. Conclusion by the auditor that the information is fairly stated as per the accounting standards makes them liable if they are found to have been materially misstated (Rittenberg, Johnstone, & Gramling, 2009). This is considered as an audit failure due to the fact that the auditor issued an erroneous audit opinion and is considered to have failed to meet GAAS. This is considered as an act of negligent.
Duty of care
Auditors are liable and can be sued due to the fact that they automatically owe external users of audited statements legal duty of care. External financial users completely rely on auditors and for the fact that they have been employed by the company are required to provide justified opinions. They therefore owe a duty of care in their process of auditing should not cause physical damage to the property of the external users or an economic loss due to their negligent acts. Reasonable care should be taken to avoid acts or omissions that will affect users. The duty of care is owed for any reasonable foreseeable negligently-inflicted loss. This calls in for the question whether the auditor acts or omissions were directed and influenced by the policies provided by the company or organization for an aim of convincing the third party in anticipation of a decision that can result to gains or benefits (Kelly, Hayward, Hammer, & Hendy, 2013). Essentially, auditors should remain independent and act without the bias of the company. Interference of the company in decisions during auditing process relieves the auditor of any liability as a result of the audited information to the third party. Consider the case of Hedley Byrne and Co. verses Heller and Partners in 1963 where there was an establishment or damage recovery as a result of reliance on negligent misrepresentations.
Auditing standards are provided for the sake of enabling expression of opinion by the auditor whether the prepared financial report is in all material aspects. The opinion determines extent of credibility since it has the potential of giving a measure of quality of the reports. Auditors therefore exercise reasonable care and skills and should not negligent acts. Acting carelessly and failure to meet sufficiently the standards of care provides the plaintiff with a platform to make claim. This place auditor at a higher position to efficiently determine with care the truth behind all financial reports provided (Johnstone, 2013). This therefore becomes a legal obligation for them to adhere to standards provided so that their acts do not harm others. The breach is more evident with the profession of auditors since they are bound by the accounting standards to act independent and provide accurate information. Their opinions should therefore reflect the accurate position of the materials and not misstating of the information to influence decisions of the third party. Auditors understand that the third party will solely depend on the audited reports to commit their investments or advance loans and will be liable if the loss was foreseeable. In 1997 the Supreme Court of Canada decision on Hercules Management Ltd verses Ernst and Young was that since the plaintiff lost investment while the auditor had foreseen the loss the defendant was liable since the auditor should have anticipated that reliance on the audited statements existed.