The topic of civil liability of an auditor has recently surfaced as the subject of much debate worldwide. Due to a number of important financial failures (Enron, Worldcom, etc.), questions have been raised concerning the role and the liability of auditors. Unfortunately, today there is no common view on the liability of audit professionals. The absence of such agreement consequently has a negative impact on audit quality as there are considerable differences between public expectations from an audit report and the functions of auditing professionals.
Recently the European Commission presented a recommendation concerning the limitation of auditors' civil liability. It indicates legal restraints and differences in auditors' civil liability regimes within the European Union, especially towards third parties, with some comparative and illustrative purposes of the United States' position due to its litigation trends, and the impact for audit firms in the European Union.
Auditors' responsibilities towards their clients, though, are less doubtful as in a majority of Member States it is well established that an auditor has a duty to act in a non-negligent manner regarding the audit of the financial statements of a client company. Therefore, if an auditor is negligent in the performance of his/her professional duties, he/she may be held liable for damages by the audited company on the basis of this contractual liability regime.
However, the question of whether individual shareholders or potential shareholders may also hold the auditor liable is less clear. Various legal cases have adopted different tests to decide whether a potential responsibility is enforceable. Usually a clear linkage is required between the issuer of the financial statements and its user, as well as a causal connection between the damage suffered by the user and the negligent act. However, for example, in Belgium the auditor is liable towards each interested party while in the United Kingdom, the Netherlands and Germany the public role of an auditor is not acknowledged. In those countries, the purpose of audited statements is to fulfill the auditor's duty to the shareholders collectively, not to the stockholders as individual or third parties.
Consequently, the auditor has to encompass a special duty of care towards the third party to be liable, i.e. the third party must prove that the auditor knew or ought reasonably to have known that the claimant would rely upon his/her work or report for a particular purpose. Under the United States legal system, the auditor's duty of care must be proved too, though, here the laws do not require an identity of specific parties be known to the auditor, only that they are members of a foreseen limited group. As the result, this has increased the exposure to lawsuits brought by shareholders, creditors and other third parties, which has caused public audit firms to cease the practice of auditing, or to go out of business entirely.
Due to the increased risks to auditors and a lack of appropriate insurance, a limitation of auditors' civil liability, therefore, seems to be appropriate. Based on the study of the London economics, the European Commission has presented four possible options for limiting auditors' civil liability. It has provided that the most appropriate solution is the introduction of proportionate liability as this would directly address concerns over the "deep pocket" syndrome and, also, would provide some prospects for a better functioning insurance market.
Giedre Rackauskaite is a lawyer at Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality "one-stop shop" approach to clients' needs in the Baltics.
