report To what extent may auditors be held liable to compensate those who have suffered financial loss as a result of their negligent advice? D, E and F

report To what extent may auditors be held liable to compensate those who have suffered financial loss as a result of their negligent advice?

D, E and F are partners in DEF and CO, a firm of accountants which acts as the auditor of Fox Ltd. N, a minority shareholder in Fox Ltd, wrote to D ‘in confidential’, asking if he could rely on DEF and Co’s audit report for the accounting period ended 31 July 2021, as he was considering making a take-over bid for the entire share capital of Fox. D sent a letter to N stating that the report could indeed be relied upon by N, but pointed out that DEF and Co’s would not accept any responsibility for financial loss caused by the reliance of any person on statements contained in the report’.

N subsequently acquired the share capital of Fox Ltd, but now considers that he has paid far too much for the shares as a result of relying on statements within the audit report which have proved to be inaccurate.

The report should cover the attached powerpoint from slide 2 – 12 (no copying from it)

 

o what extent may auditors be held liable to compensate those who have suffered financial loss as a result of their negligent advice?

D, E and F are partners in DEF and CO, a firm of accountants which acts as the auditor of Fox Ltd. N, a minority shareholder in Fox Ltd, wrote to D ‘in confidential’, asking if he could rely on DEF and Co’s audit report for the accounting period ended 31 July 2021, as he was considering making a take-over bid for the entire share capital of Fox. D sent a letter to N stating that the report could indeed be relied upon by N, but pointed out that DEF and Co’s would not accept any responsibility for financial loss caused by the reliance of any person on statements contained in the report’.

N subsequently acquired the share capital of Fox Ltd, but now considers that he has paid far too much for the shares as a result of relying on statements within the audit report which have proved to be inaccurate

this is all about the question

Requirements: 1200   |   .doc file LLAW3007 Principles of Law

Question 8
Tsang Yeung Man, Donald  21209413
Lu Long  Ji ,George   20213743
ZHANG JIN LIN, Kelly  21212937
Shao Cheng Ze, Terrell  21218633

(a)To what extent may auditors be held liable to compensate those who have suffered financial loss as a result of their negligent advice?

Negligence  (Unintentional tort)
The plaintiff must establish the following 4 criterias in order to sue the defendant in negligence for suffering any injury or damage caused by a careless act or omission of the defendant:
The defendant owes a duty of care to him;
The defendant has breached that duty;
The breach of duty has, in fact, caused injury or damage and 
The injury or damage is not too remote (i.e. it is a foreseeable result of the defendant’s breach of duty).

Auditor’s duty to care
The code of professional conduct states that auditors must go about their business with due care. Due care is the “prudent person” concept.
Due care generally implies four things:
The auditor must possess the requisite skills to evaluate financial statements
The auditor has a duty to employ such skill with reasonable care and diligence
The auditor undertakes his tasks with good faith and integrity but is not infallible
The auditor may be liable for negligence, bad faith, or dishonesty, but not for mere errors in judgment

 Caparo Industries Plc (Caparo) v Touche Ross (1990)
Summary of the case:
Caparo pursued the firm Touche Ross  following a series of share purchases of a company called Fidelity plc. Caparo alleges that the purchase decisions were based upon inaccurate accounts that overvalued the company. They also claimed that, as auditors of Fidelity, Touche Ross owed potential investors a duty of care. 
The claim was unsuccessful; the House of Lords concluded that the accounts were prepared for the existing shareholders as a class for the purposes of exercising their class rights and that the auditor had no reasonable knowledge of the purpose that the accounts would be put to by Caparo.

Existence of auditor’s duty of care
It was this case that provided the current guidance for when duty of care between an auditor and a third party exists. Under the ruling this occurs when:
the loss suffered is a reasonably foreseeable consequence of the defendant’s conduct
there is sufficient ‘proximity’ of relationship between the defendant and the pursuer, and
it is ‘fair, just and reasonable’ to impose a liability on the defendant.

Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay (Bannerman) (2002).
RBS alleged to have lost over £13m in unpaid overdraft facilities to insolvent client APC Ltd. They claimed that Bannerman had been negligent in failing to detect a fraudulent and material misstatement in the accounts of APC. The banking facility was provided on the basis of receiving audited financial statements each year.
In contrast to Touche Ross, who had no knowledge of Caparo’s intention to rely upon the audited financial statements, Bannerman, through their audit of the banking facility letter of APC, would have been aware of RBS’s intention to use the audited accounts as a basis for lending decisions.

Exemption for auditor’s liability
It was upheld that they owed RBS a duty of care. The judge in the Bannerman case also, and crucially, concluded that the absence of any disclaimer of liability to third parties was a significant contributing factor to the duty of care owed to them.

Causation
After the  duty of care is breached  by the defendant  to the plaintiff,  the next question is  whether the plaintiff’s injury was in fact caused by the defendant
To determine the liability, the court will apply the `but for’ test, that is without negligence of defendant, the plaintiff’s injury or damage would not have occurred. 
If it is the case, there is casual link between defendant’s negligence and plaintiff’s injury is established

Chan Yik Kwan v Yuen Chak Man [2000] 
The defendant reversed the van negligently and hit the plaintiff.  The impact on the plaintiff was trivial.  However, the plaintiff suffered an intra-cerebral rupture which resulted in a minor stroke. The plaintiff sued the defendant in negligence, claiming that as the rupture occurred after he was hit, it was the trauma of being hit that caused the sudden surge of blood pressure and triggered the stroke.  At issue was whether the collusion caused the plaintiff’s medical condition. 

Held of the case 
It was for the plaintiff to satisfy that it was more likely than not that the injury (i.e. the stroke he suffered) was the result of the defendant’s negligence. To do that, the plaintiff had to establish a link between the defendant’s negligence and the relevant damage.
The plaintiff’s blood pressure which brought on the intra-cerebral [rupture] was caused by the excitement, stress and rage stemming from the plaintiff’s altercation with the defendant.  The collusion was an unfortunate and unnecessary episode of that altercation.  However, given the timing and minor nature of [the collusion] compared with the vigor and duration for what was a vehement and angry exchange, there was no way it could be singled out as a sole, separate cause [of the plaintiff’s condition] or as a materially contributory one.’ (Deputy Judge Gill)
The plaintiff’s claim failed because he had failed to establish the causal link between the defendant’s negligence and his injury.  

Conclusion
Auditors will be held liable to compensate those who have suffered financial loss as a result of their negligent advice when the following criteria are fulfilled:
✓Auditor owns a duty of care to the plaintiff, established that the duty of care exists  (Caparo v Touche Ross) and the liability of auditor are not exempted (Royal Bank of Scotland v Bannerman);
✓Auditor’s breach the duty of care(for example, audit failure);
✓The plaintiff suffered a real loss(not an opportunity cost/loss)
✓There was casual connections between the Auditor’s negligence and the plaintiff’s loss (Chan Yik Kwan v Yuen Chak Man)

Question b

Fox Ltd
Accounting firm:
DEF and CO
N
F
E
D
Shareholder
Auditor
Take-over bid for the entire share capital of Fox
Audit report for the accounting period ended 31 July 2021
Not accept any responsibility for financial loss caused by the reliance of any person on statements contained in the report

Send email ‘confidentially’
Result:
N acquired the share capital of Fox Ltd.
N paid far too much for the shares
Consider: Relying on statements within the audit report which have proved to be inaccurate.

Issue: 
 DEF and CO need to compensate N for the overpaid amount?

Fact: 
N has a right to institute a legal claim against DEF. 
DEF with reasonable care when advising N in regard to his intention of making a take-over bid for the entire share capital of Fox Ltd.

The third party plaintiffs have to show the court :
1. The auditor owed a duty of care, and
2. The auditor breached that duty of care, and
3. The plaintiff suffered a loss(real loss)
4. Causal relationship between the auditor and the plaintiff

Duty of care 
Three elements need to be met:

Foreseeability of harm
Proximity
 Fair, just and reasonable

N is a shareholder of Fox Ltd.
N is directly affected by the proposal
N Dependence on the audit report provided by DEF and CO 
DEF and CO should provide reasonable opinions

  Negligence 

 Code of practice for auditors : Auditors should conduct their business with due care and diligence.

Professionals–Auditor’s standard of care:   
Express an opinion on the financial statements
Review the fairness and truthfulness of the financial statements

Case: 
DEF and Co provided the audit report to N which has been proved to be incorrect
Due to the negligence

Wharf Properties Ltd v Eric Cumine Associates, Architects, Engineers & Surveyors [1991] 
Plaintiffs: Developer
Defendant: Architects

Fact
Hong Kong property developer company appointed architects to design the rebuilding of 
    Harbour City in Tsim Sha Tsui. 
The developer considered that the architects had wrongly calculated the plot ratio.
The maximum volume allowed by the government was not reached.
 The developer sued the architects.

Architect’s code of conduct to the developer:
Complete the work within a reasonable agreed time 
Inform the developer of the progress of the work and the physical data of the building

Held:
The defendants had followed the architects’ codes of conduct, they had not breached the standard of care 

Causation 

N suffer economic loss(real loss)
Pay more money to acquire Fox Ltd stock

N needs to provide proof that his loss is causally related to DEF and CO
Loss due to auditor negligence
Not these reasons: Stock market turbulence, sudden other unexpected reasons 

Barnett v Chelsea & Kensington Hospital Management Committee [1969]
Fact:
Plaintiff: The wife of the deceased
Defendant: Hostipal

2 pm
5 am
8 am
12 noon

The plaintiff shared some tea with two other watchmen

All three men continued to vomit

Key points of treatment

The plaintiff death

Barnett v Chelsea & Kensington Hospital Management Committee [1969]
Issue: 
Was the defendant’s negligence the cause of the death? 
Would it have inevitably happened anyway?

Held: 
The cause to his death was not the negligence of the hospital. 
Doctors normally diagnose plaintiff and decide to keep them in after 11 a.m. 
Which means no intravenous drip until 12:00. 
The doctor confirmed the potassium loss after 12:30. 
In other words, the plaintiff did not receive treatment before 12:00, and his survival rate is low. Other leading doctors agreed. 
As a result, doctors did not have the opportunity to administer medication to the plaintiff in a timely manner. 
The court held that the plaintiff failed to establish that the death of the deceased resulted from the defendant’s negligence 

Exemption clause 

It must have been incorporated into the contract

Its wording must be clear and wide enough to protect the party relying on it

It must not be in contravention of any provision of CECO

Parker v South Eastern Railway (1877)

-Fact:
-Plaintiff: Parker
-Defendant: South Eastern Railway

-Plaintiff paid to leave his bag in the cloakroom of Defendant
-There was a notice within the cloakroom stating that Defendant would not be responsible for any deposits exceeding £10
-Parker’s bag was lost or stolen
-Plaintiff successfully claimed for his lost bag
-Defendant appealed

Parker v South Eastern Railway (1877)

-Issues:
-The plaintiff claimed that he did not see the notice
-The defendant claimed that he had taken sufficient measures to get customers to notice these notices

-Held:
-A re-trial was ordered
-Plaintiff would be bound providing the jury were satisfied he had been given sufficient notice

Mendelssohn v Normand Ltd (1970)

-Fact:
-Plaintiff: Mendelssohn
-Defendant: Normand Ltd

-There is a warning sign in the parking lot that says accept no liability for any loss of damage sustained by the vehicle, its accessories or contents howsoever caused
-It is difficult to see the warning sign when the driver enters the parking lot, but the warning sign when the driver gets off the car to pay the parking fee is very conspicuous
-The plaintiff put his valuables in the car, but the valuables were stolen

Mendelssohn v Normand Ltd (1970)

-Issue:
-Whether an exclusion clause could be successfully incorporated into a contract by way of a notice board if the notice board was not visible when a client was entering the car park, but was visible at the end when they went to pay for parking.

-Held:
-The court held in favour of the Plaintiff, observing that the Defendant had not done enough to bring the notice to the attention of his customers so as to successfully incorporate it into a contract with the Plaintiff.

Conclusion

For the disclaimer, the defendant is not responsible for the plaintiff’s economic losses because:

1. Before the plaintiff invested, the defendant had pointed out that the company would not be responsible for the losses he suffered

2.The defendant has clearly pointed out the scope covered by the statement in the exemption clause

3.This exemption clause does not violate CECO

The exemption clause applies, and the defendant does not have to compensate the plaintiff for economic losses

The end

Q and A

Reference

Wharf Prop. Ltd. v. Eric Cumine Assoc. (1991)

https://ca.vlex.com/vid/wharf-prop-ltd-v-680632009

Barnett v Chelsea & Kensington Hospital Management Committee [1969]

https://casebrief.fandom.com/wiki/Barnett_v_Chelsea_%26_Kensington_Hospital_Management_Committee

Parker v South Eastern Railway (1877)

https://www.lawteacher.net/cases/parker-v-south-eastern-railway.php?vref=1

Mendelssohn v Normand Ltd (1970)
https://www.lawteacher.net/cases/mendelssohn-v-normand.php?vref=1

Caparo Industries Plc (Caparo) v Touche Ross (1990)
Royal Bank of Scotland (RBS) v Bannerman Johnstone MacLay (Bannerman) (2002).

https://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/auditor-liability.html

Chan Yik Kwan v Yuen Chak Man [2000] 
Glofcheski, R. (2012). Tort Law in Hong Kong (3rd ed.). HK: Sweet and Maxwell.

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