AUDITING

G R O U P - 4
KASHISH GROVER BCH/22/39

PURNIMA DUBEY BCH/22/46

SIMARPREET KAUR BCH/22/79

VIDHI GOENKA BCH/22/112

KANISHKA BCH/22/113
LIABILITIES OF AN AUDITOR - UPTILL
LIABILITIES UNDER COMPANIES ACT 2013
"An auditor is not bound to be a detective, or, as was said, to approach his work
with suspicion or with a foregone conclusion that there is something wrong."
1. Introduction to Auditor's Liabilities
( KASHISH GROVER BCH/22/39 ) C
O
2. Civil Liabilities of an Auditor
( PURNIMA DUBEY BCH/22/46 ) N

3. Criminal Liabilities of an Auditor

T
( SIMARPREET KAUR BCH/22/79 )
E
4. Professional Liabilities Under the Chartered Accountants Act, 1949 N
( VIDHI GOENKA BCH/22/112 )

T
5. Auditor's Liability in Global Context
( KANISHKA BCH/22/113 )
S
01
INTRODUCTION TO
WHO IS AN AUDITOR?

○ A qualified individual or firm responsible

for reviewing and verifying the financial
statements of an organization.

○ Auditors assess the accuracy of financial

AUDITOR’S LIABILITY reports and ensure compliance with
regulatory standards.

Auditor's liabilities play a vital role in

KEY QUALITIES OF AN AUDITOR: maintaining the integrity of financial
reporting.
○ Independence
○ Professional skepticism
The auditor’s roles and responsibilities are
○ Integrity
essential to ensuring accuracy and
compliance.
WHAT IS AUDITOR'S LIABILITY?
Different types of liabilities (civil, criminal,
○ The legal responsibility auditors have for
and professional) hold auditors
their work.
accountable for their actions.

○ It ensures that auditors perform their

○ Auditor's liability not only protects the
duties with due care and integrity.
public but also enhances the credibility of
financial markets by ensuring transparency
○ A key factor in maintaining public trust in
and fairness.
financial reporting.
02 ROLES AND RESPONSIBILITIES
OF AN AUDITOR
KEY ROLES:
[Link] of Financial Statements: Ensure that
IMPORTANCE OF AUDITOR’S
LIABILITY IN FINANCIAL REPORTING

WHY AUDITOR'S LIABILITY MATTERS ?

financial statements give a true and fair view.
[Link]: Ensures that auditors are accountable
2. Compliance with Laws and Regulations: Verify that for their work, reducing the chances of negligence.
the entity complies with all applicable laws and
regulations. 2. Public Trust: Reinforces confidence in the reliability
of financial statements, which is crucial for investors,
3. Risk Assessment: Evaluate the risks of material regulators, and stakeholders.
misstatements in financial reports.
3. Deterrence: Prevents auditors from engaging in
4. Reporting: Issue an audit report with an opinion on unethical practices or colluding with management.
the financial statements.
IMPACT ON FINANCIAL REPORTING:
OTHER RESPONSIBILITIES:
- Ensuring the internal controls are in place and Accurate audits protect the integrity of financial
effective. markets.

- Detecting fraud (if any) or errors in financial Ensures businesses are transparent about their
reporting. financial health
03
CIVIL CRIMINAL PROFESSIONAL
LIABILITY LIABILITY LIABILITY
Occurs when an auditor fails to Arises when an auditor willfully Refers to the breach of professional
exercise reasonable care in participates in fraudulent activities conduct or ethics as defined by
performing an audit, resulting in or deliberately misrepresents facts in regulatory bodies (e.g., ICAI in India,
financial harm to a third party. audit reports. SEC in the US).
Arises when auditors are sued for Auditors may face criminal charges if Auditors may face charges if they
damages caused by negligence or they engage in fraudulent activities or engage in any misconduct . Penalties
breach of duty intentionally provide misleading audit can include fines
opinions. Penalties can include fines
EXAMPLES OF CIVIL LIABILITY and imprisonment.
Shareholders suing an auditor for DISCIPLINARY ACTIONS
EXAMPLES OF CRIMINAL
failing to detect fraudulent
OFFENSES
financial reporting. Auditors may face sanctions such as
fines, license revocation, or
Negligence in auditing Providing false audit opinions.
suspension from practicing.
misstatements.
Concealing or altering financial
documents to mislead EXAMPLES OF PROFESSIONAL
Failure to identify fraud in financial
stakeholders. MISCONDUCT
statements

CONSEQUENCES Failing to maintain independence.

LEGAL ACTIONS
Heavy fines, imprisonment, or both. Breach of confidentiality.
Shareholders or creditors may sue
the auditor for compensation
04
LIABILITY FOR NEGLIGENCE TOWARDS CLIENTS

Negligence: When an auditor fails to detect fraud or

inaccuracies due to carelessness or not following due
procedures, they can be held liable for negligence.

Liabilities for Damages for Negligence:

- Duty of care was owed by the auditor.
- The auditor breached that duty.
- The breach caused financial harm or loss.

Examples of Negligence:
- Failure to investigate suspicious transactions.
- Overlooking material misstatements in financial
reports.

CIVIL LIABILITY
05
LIABILITY FOR NEGLIGENCE TOWARDS
THIRD PARTIES
Auditors can be held liable to third parties, like
investors, creditors, or other stakeholders, if they rely
on the auditor’s report to make decisions and suffer ‘’In matters of truth and
justice, there is no difference
financial losses due to inaccurate or misleading
between large and small
reports.
problems, for issues
concerning the treatment of
Key Points: people are all the same.’’
- Privity of Contract
- Foreseeability of Loss
- Extent of Liability

EXAMPLE:
An investor purchases shares based on the audited
financial statements, which fail to disclose significant
Financial risks. If the investor incurs losses due to the
misleading financial reports, the auditor can be held
liable for damages.
06 CASE LAWS AND EXAMPLES OF

3. HEDLEY BYRNE &

CO. LTD. V. HELLER &
CIVIL LIABILITIES

1. LEGAL ESTATE BUILDING

PARTNERS LTD.
AND INVESTMENT CO. V.
(1964)
SHEPHERD (1887)

2. LONDON OIL STORAGE

CO. LTD. V. SEEAR,
HASLUCK & CO. 4. JEB FASTENERS LTD. V.
(1904) MARKS BLOOM & CO.
(1981)
07 FRAUDULENT REPORTING AND
MISREPRESENTATION

Fraudulent reporting and misrepresentation are

CRIMINAL LIABILITY

serious offenses that can result in criminal liability for

an auditor.

A U D
1. Fraudulent Reporting FR
Fraudulent reporting occurs when an auditor
knowingly or deliberately issues false or misleading
audit reports. This involves concealing the true
financial position of a company, manipulating data, or
failing to disclose critical information that would
affect the fairness of the financial statements.

2. Misrepresentation
Misrepresentation refers to providing false or
misleading information in an audit report, either by
omission or commission. Unlike fraudulent reporting,
which is typically intentional, misrepresentation can
sometimes stem from reckless disregard for facts or
failure to exercise due diligence.
08ISSUANCE OF FALSE CERTIFICATES LIABILITY UNDER INDIAN
PENAL CODE (IPC)

Issuance of false certificates by an auditor is a

serious offense that can lead to criminal liability. In India, an auditor can face criminal liability
under various sections of the Indian Penal Code
False certificates typically refer to audit reports or (IPC) if they engage in fraudulent activities,
other formal attestations that intentionally collusion, or intentional misconduct that results
misrepresent the financial position or performance in harm to stakeholders or violation of law.
of a company Criminal liability arises when auditors knowingly
or willfully engage in illegal activities or
Definition of False Certificates: fraudulent conduct during the course of their
duties.
 False certificates refer to audit reports, financial
statements, or any other
formal certifications issued by an auditor that
contain incorrect, misleading, or fraudulent
information, knowingly or through gross negligence.
09 CASE LAWS ON CRIMINAL
LIABILITIES

Criminal liability for auditors arises

when they engage in fraudulent,
deceptive, or illegal activities while
conducting audits or preparing
financial statements

1. Arthur Andersen LLP v. United States

(2002)

2. Satyam Scandal (2009) – India

3. Equitable Life Assurance Society

Case (2005) – United Kingdom
10
PROFESSIONAL LIABILITIES UNDER THE
CHARTERED ACCOUNTANTS ACT, 1949

Professional Liabilities under the Chartered Accountants

Act, 1949 refer to the legal and ethical responsibilities that
chartered accountants in India must uphold in their
professional practice. These liabilities are designed to
maintain the integrity of the profession and protect public
interest.

Key points:

* Legal obligations * Public protection

* Ethical standards * Professional integrity

* Accountability * Regulatory compliance

* Disciplinary measures * Quality assurance

11 MISCONDUCT AS PER CHARTERED
ACCOUNTANTS ACT, 1949

This section defines what actions are considered improper for chartered
accountants. It includes:

- Breaking professional rules

- Not following accounting standards
- Sharing client information without permission
- Advertising services in an unprofessional way
- Taking part in activities that harm the reputation of the profession

DISCIPLINARY MECHANISM OF ICAI

- There's a special committee to look into complaints
- They investigate the issue thoroughly
- The accused accountant gets a chance to defend themselves
- If found guilty, the committee decides on appropriate punishment
- There's also a process for appealing the decision

DISCIPLINARY PROCEDURE:
Step 1: Complaint Filing

Step 2: Investigation by the Director

Step 3: Referring to the Disciplinary Committee or Board of Discipline

Step 4: Proceedings and Decision

12 ETHICS AND CODE OF CONDUCT FOR AUDITORS

- Always be honest and fair

- Stay independent and unbiased
- Keep client information secret
- Be professional in all dealings
- Continuously improve skills and knowledge
- Avoid conflicts of interest
- Report any suspicious activities they find

PENALTIES AND SANCTIONS IMPOSED BY ICAI

This section covers the punishments ICAI can give to accountants who
break rules:

- Warnings for minor offenses

- Fines for more serious issues
- Suspending the accountant's license for a certain time
- Cancelling the accountant's membership permanently in extreme cases
- Requiring additional training or education
- Publishing the accountant's name and offense in ICAI's journal
13 AUDITOR'S LIABILITY IN GLOBAL CONTEXT

INTERNATIONAL STANDARDS ON
AUDITING (ISA) AND AUDITOR’S
LIABILITY

The International Standards on Auditing (ISA)

provide a framework for auditing practices
globally, aiming to enhance the quality and
consistency of audits. They establish the
responsibilities of auditors, including their duty
to obtain reasonable assurance that financial
statements are free from material
misstatement. Non-compliance with these
standards can lead to increased liability for
auditors.
14COMPARISON OF AUDITOR’S LIABILITIES IN
RECENT INTERNATIONAL CASES INVOLVING
AUDITOR’S LIABILITIES

Enron Scandal (USA): This case involved Arthur

Andersen LLP, which was found guilty of
INDIA VS. OTHER COUNTRIES (E.G., USA, UK)
obstructing justice related to its audits of Enron
India, the United States, and the United Kingdom have Corporation’s financial statements. The fallout
different legal frameworks for auditor liability. In India, led to significant changes in auditing regulations
auditors face both civil and criminal liabilities for through the Sarbanes-Oxley Act.
negligence or misconduct, with civil liabilities arising
from claims made by clients or third parties, and criminal
liabilities involving penalties or imprisonment for Carillion Collapse (UK): KPMG faced scrutiny after
fraudulent activities. In the United States, auditors can Carillion’s bankruptcy revealed alleged failures in
be held liable to clients and third parties if they fail to auditing practices that did not adequately reflect
meet the required standard of care, as highlighted in the the company’s financial health prior to its
landmark case Securities Exchange Commission v. Arthur collapse.
Andersen LLP. In the United Kingdom, auditors have a
duty of care towards shareholders but are generally Satyam Scandal (India): This case involved
protected against claims from third parties unless there PricewaterhouseCoopers (PwC), which was
is evidence of gross negligence or fraud. Overall, the accused of failing to detect fraudulent activities at
specific legal frameworks and protections available differ Satyam Computer Services Limited. The Indian
significantly between the three countries. government imposed severe penalties on PwC
following this incident.
15 HOW GLOBAL STANDARDS IMPACT INDIAN
AUDITORS

Global auditing standards significantly influence Indian

auditors through frameworks like ISAs adopted by
various regulatory bodies within India such as the
Institute of Chartered Accountants of India (ICAI). The
adoption of these standards aims at enhancing audit
quality and aligning Indian practices with international
norms.

The impact includes:

Improved Quality Control

Enhanced Credibility

Legal Framework Alignment

THANK YOU!