Negligence of Auditors - Essay Example

Business law Question Policy Negligence refers to an occurrence caused by neglect of responsibility thereby causing either lossof life or financial investments. Various corporate institutions that collapse cause varied financial losses for both investors and employees. The investors vary from shareholders to the creditors whom the company relies on for steady funding. Following such collapses, the stakeholders always demand accountability for their investments a feature that compels the launch of investigation into the causes of the collapses. Negligence as a cause of the collapse of a corporate organization arises from the actions of the management of the organization thereby necessitating the subsequent financial loses1. While the determination of the causes of the collapse of corporate organizations is fundamental, courts discourage the filing of such cases by either the shareholders or creditors. The decision by courts to adopt the cautionary approach to such cases arises from a policy that seeks to protect the interest of the entire industry. Such subsequent claims undermine the future of the entire industry owing to the large volumes of indeterminate liabilities. After the collapse of a company, it becomes difficult to quantify the actual investment of every financer. Most of such organizations lose their assets a feature that makes it difficult for investigations to determine the actual liability the organization owes every investor. This has a negative influence on both the industry and the economy since auditors will subsequently withhold their services2. As explained earlier, quantifying unknown liabilities discourages the participation of auditors of will not trace such liabilities. The policy therefore seeks to protect the interests of all the stakeholders in the industry3. Question 2: Case law Various companies have collapsed through scandalous ways in Australia among other markets throughout the world. In the legal tussles that ensued after the collapse of such companies, the courts maintained integral view often seeking to cushion the various publics from incurring major financial loses4. Auditors have integral responsibilities in the evaluating and quantifying the amount of financial loses all the parties incur. However, the decisions of the courts vary depending on the unique features presented by every case. Ansett Australia, once a major airline company in Australia collapsed in 2002 following a series of unwarranted market forces. The company began incurring losses in 1999 following unscrupulous operations thereby prompting the courts to make various unprecedented rulings on the future of the company in order to protect the interests of all the parties involved. Among such decisions was the need to place the company under administration in 2001 and organized liquidation in 2002. In the year following the insolvency of the company, the court sought to make profits for the company thereby reimbursing the investors whenever possible. Public companies obtain most of their funding from the public through the purchase of shares; this requires effective administration coupled with the need for integrity in order to sustain the profitability objective demanded by every investor. Ansett Australia was such a company that had won public trust owing to its monopolistic nature. A large operational capital equally required increased and sustained profitability in order to grow the company and earn profits for the investors5. When the companies began incurring losses in 1999, the Australian court ordered for the audit of the company. This would help determine the financial flow in the company. The auditing process seeks to determine any fraud by determining any illegal movement of money. The auditors also determine the source of the losses in the company. In doing this, the auditors maintain an integral position since the parties in the case can equally sue the auditors for fraud should they collude with the interested parties to hide some financial movement. The auditing process in Ansett cases determined poor investment options as the source of the loss. They also determined that continued operation of the company would result in more financial loses for the various investors6. The decision to place the company under administration would therefore protect the investors from incurring unnecessary loses. Through the period, the government would supervise the management of the company as it paid its debts. This would protect the economy that would suffer great financial dip following the shocks created by the rapid collapse of such a big company. The Ansett case thus exhibits the conscious of portrayed by the courts and their attempts to protect the investors and to perpetuate the operations of the auditing firms. The court adopted the report developed by the auditors and sued it as a major reference point in the case. Question 3: Negligence of auditors The legal liability of an auditor refers to the responsibility of the auditor to both the client and the third parties relying on the work of the auditor. In most cases, such third parties include the shareholders and creditors of the company7. Any of such parties can sue the auditor for either fraud or negligence provided they can prove breach of contract, loses, causation and duty. The law protects all the parties from shoddy work by the auditors should such work contain errors of either omission or commission. In determining the errors, the interested party must therefore prove the above factors to the court. In tort or common law, negligence in the other hand refers to failure to act reasonably in like circumstances. This demands that people act carefully and cautious of the harm their actions present to those around them. The same is required of people tasked with various responsibilities. In a court of law, one should prove the potential of harm caused in order to prove negligence. This will also only prove the harm caused by inattentiveness but not intentional harm. Question 4: Opinion I agree with the current law The difference in the definition of negligence in the two case scenarios arises from the importance of auditors. Auditors’ negligence cause similar loses whether intentional or accidental. As professionals, auditors must always prove the quality of their works by delivering the desired quality of in their every assignment8. The credibility of court cases and the fates of all the parties entangled in such depend on the report provided by the auditors. The auditing reports provide fundamental evidence that as explained in the case of Ansett in Australia helped the government protect the millions of investors from incurring huge loses. The current law therefore seeks to protect the parties of similar court cases thereby maintaining the legitimacy and integrity required in the profession. The law does not isolate the auditors but reminds them of the seriousness of their jobs and the need to act with both integrity and caution in order to prevent either intentional or unintentional auditing mistakes. Bibliography Carroll, B. (1980). Australian Aviators An Illustrated History. North Ryde: Cassell Australia. Feinman, J. (2010). Law 101. New York: Oxford University Press. Kapardis, A. (2009). Psychology and law: A critical introduction. Cambridge: Cambridge University Press. Overseas Tankship (UK) Ltd v Miller Steamship Co Pty [1966] 2 All E.R. 709 Palsgraf v. Long Island Rail Road Co. (1928) 162 N.E. 99 Slomanson, W. (2011). Fundamental Perspectives on International Law. Boston, USA: Wadsworth. Ultramares Corp. v. Touche(1931) 255 N.Y. 170, 174 N.E. 441 Whittington, R. & Pany, K. (2012). Principles of Auditing and Other Assurance Services (18 ed ed.). New York: McGraw-Hill Publishers. Read More