The general rule of liability of auditors in tort is defined in the case of Caparo v Dickman, which restricted the duty of care that auditors owed in respect of audit services to the company itself, and not to any individual members or potential investors. This represented a restriction of the neighbourhood principle defined in Donoghue v Stevenson.
However a duty of care can be established via the special relationship rule established in the case of Hedley Byrne v Heller. In order to establish these relationships the following must occur:
·Auditor would give an opinion acting in a professional capacity
·The third party would be expected to be able to rely on that opinion
·The third party acts upon the opinion and suffers an economic loss
In such circumstances the third party may recover their losses from the auditor. Where an auditor is working in a non-audit capacity they are likely to have a higher duty of care imposed upon them. For example when advising a company on issues such as a takeover the auditors may owe a duty of care to known takeover bidders per Morgan Crucible v Hill Samuel. Full liability in such cases has been established in cases such as ADT v Binder Hamlyn.
Provisions under the Companies Act 2006 have made it possible for auditors to agree with their clients a cap on their liability. In order to achieve a fixed or proportionate cap on negligence claims the auditors must receive approval of the members of the company via an ordinary resolution. This approval must be gained each year.
Should an auditor wish to rely upon such a clause they may have to prove to the satisfaction of the courts that the limit is ‘fair and reasonable’. In ruling on such matters the courts will consider:
·The auditor’s responsibilities
·The nature and purpose of the auditor’s contractual
·The professional standards expected of him |
