Define Auditors liability…………
Auditor’s liability refers to disputes that arise between two parties as a result of act or performance of another. In auditing there several potential conflicts which may arise due to the opinion given to the public that may not reflect true and fair presentation. The types of liabilities include civil liabilities, exposure liabilities, liability of negligence, and liability of being liable and liability of third party, misstatement of prospectus and breach of contract. Recent reforms in Australia have seen some of these liabilities being adjusted to give insulation to the upcoming ventures, and confidence to the auditors who previously were afraid of auditing their accounts. Hence, in removing the imbalances, in the current system Australian statutory bodies have to look for away of bringing reforms which include capping of liability and incorporation of firms conducting audit services. The major liabilities that bring about economic losses are the several and joint liabilities which up to now are being replaced by proportionate liability. Consequently, the tendency to sue audit firms because of their professional requirement, and the liabilities incurred will be a thing of the past as more reforms are conducted to curb the consequences involved.
Development and Implementation of CLERP 9 Act
Following the collapse of HIH Insurance and One.Tel in Australia there was a great outcry of the effectiveness of corporate governance practices and financial regulation. Together with other international scandals like Enron failure, WorldCom collapse and Lehman Brothers collapse resulted into development of various theories that explained the causes and how prevention would have been mitigated in each scenario. The collapses of the two corporations in Australia was as a result of a number of similarities; as both companies had captivating and outstanding CEOs and they were both involved in high risk practices in exceedingly competitive markets. The practices include refusal to conduct discretion insurance scopes, carrying out trade in the complicated London reinsurance market and serious losses in the compensation market for Californian workers. This led to devastating losses for HIH. Australia used a system of continuous disclosure for all publicly quoted companies since the year 1994.
The proceedings in the two corporations impelled a succession of restructurings in Australia simultaneously with reforms in UK and US. This included governmental reforms, authority modification by self-regulatory organizations and court decision-making. The critical Australian governmental restructuring is the CLERP which involved reform in audit and corporate disclosure (the CLERP 9 Act 2004). This was in disparity to the Sarbanes-Oxley Act of 2002 (SOX) because it had a long growth era and was the topic of widespread public discussion and capitulations proceeding to its eventual inauguration in July 2004. The CLERP 9 Act 2004 encloses significant dogmatic reforms linking to the audit duty presentation, investor involvement in governance managerial reward CLERP 9 Act 2004 accepts many trademarks of the HIH crumple and consequent royal commission.
Development of Limited Liability Legislations in Different States Of Australia
The first firm to be formed in Australia was New South Wales (NSW) Bank in 1817 during the pre-colonial period. The formation required a charter approval from the government in London. The charter was denied as it was of the view that depositors were being put at risk. Hence it resulted into formation of Limited Liability Act. The Bank then operated as unincorporated joint stock firm working under partnership deed laws. It allowed for shares transfer and Board of directors management. First share were listed in 1855 and published by William Barton who was one of the first stockbrokers. The main impediment was that the firms were not incorporated hence could not sue or be sued in their own names. The 1840’s collapse of pastoral boom led to recession which led to failure of eminent companies like Bank of Australia. Many other banks collapsed as a result of absence of a charter. Nevertheless, the formation of companies improved steadily after 1851 as the population increased in New South Wales and Victoria. Investment increased as remarkable equity growth was observed especially in newly established colony in Victoria. Due to mining in Victoria more broking firms were established in Melbourne and Sydney. Attempts were made to introduce limited liability to encourage development of business. Several Acts were passed by NSW parliament which led to incorporation of leading Banks, mining and insurance companies. An Act for better regulation of mining firms was passed by Victoria to pioneer a form of incorporation and limited liability for corporations in mining. The shareholders were majorly miners which also saw the introduction of a similar legislation in NSW. The stock exchange became well profound in Victoria due to application of limited liability mining companies. Company registration was a complex issue as it could be registered under various Acts making the processes cumbersome. A major improvement came when the application of company form by many mining firms dominated the colonial stock exchange which coincided with modern company’s legislation.
Incorporation of Audit Liability Limitation agreements
In the companies Act 2006 under section 532 -538 auditors were given an opportunity to bargain with the firms which they are auditing their accounts to constrain their liability to an amount that was fair and reasonable in all situations. This called for a separate agreement in every year’s audit which was to be approved by the owners of the firm. An autonomous working group was found in 2007 by the financial reporting council to give guidance to directors on the application of the agreements to limit the auditor’s liabilities of the firm. This was at a request by the accountancy profession in conference with other parties interested. The purpose of the guidance was to give a description of what was not permitted in the Companies Act 2006 and give some conditions relevant when evaluating the agreement. The guidance was also to provide sample clauses for inclusion in the agreement and to elaborate the process to be adhered to in getting the approval from the shareholders. The motive behind audit liability was due to the fact that Australian audit firms are vulnerable to substantial financial risk like being prohibited from incorporating into a company or a limited liability partnership. The firms are often litigated in predilection to other probable accountable parties. This is because they required by the law to posses a significant proficient liability cover despite the fact that they may only be partly responsible. There are serious repercussions for Australian capital markets in the whole community. Hence audit firms are likely to decline in giving opinions that go beyond legal limit. This will make start-up companies to be more risk as perceived by the audit firms hence they will not be audited as a result difficult in raising capital. It was then recommended that several and joint liability be replaced with proportionate liability for claims. This will ensure professional indemnity insurers are in a condition to scale down the premiums, and incur lower business costs. With audit liability provisions business and shareholders would gain from access to audit services, new business venture will also gain from quality services from auditors willingness to audit their accounts and the audit would gain by pulling in quality professions of higher ranks.
Regulation Compliance to Professional Indemnity Insurance
These regulations were formerly issued in 1991 the month of August. Revisions have been done to improve on the transparency of the improvements and modification. Compliance is mandatory to all members who have certificate for practicing and are involved in public conduct without considering the amount of income for their practice. The regulations to be complied by insurance companies include; regulations in Accountancy and Actuarial Discipline board and scheme whose purpose is to investigate and where necessary get hearings by tribunal of Public interest discipline (ICA 2007). Besides, there should be compliance to appeal committee regulations which give the methodological rules for petitions. Moreover, insurance companies should comply to disciplinary committee regulations that provide procedure in dealing with complaints (Bottomley 2002).
Unifying professional liability legislation under the Federal system
The federal law requires that a company must present its annual audited financial report and get an auditor’s audit report. This prerequisite is contained in section 301 of the corporations Act 2001 this comprise of compulsory financial reporting pre-requisite, ratified in the era of large scale company losses, frauds in lands and banks. These requirements were vital in protecting the investors from financial fraud as a result of misconduct in giving public opinions. This is because, audits should enhance confidence and give investors empowerment to make rational and informed financial decisions. In respect to the CLERP 9 restructuring, the auditor may be incorporate or a company which applies in a span of one month after registering the company. The auditor appointed holds the position until the initial annual general meeting of the firm. Thereafter he or she must hold office indefinitely. However, after the amendments, there should be rotation of auditors after five years. The auditors must be nominated by members of the company through voting but most appointments are made by directors who have the final influence. (Walmsley, Abadee and Zipser 2007). The auditor may be removed from office by a resolution passed at a general meeting instigated by the directors and members.
The auditor must carry out audit in respect to auditing morals made by auditing and assurance standards board. He or she must hand in to the directors an affirmation there no auditor independence pre-requisite has not been contravened. (CLERP 2002, P. 27). The report must give any fault or irregularity in the firms’ financial reports relating to the records available. Legal proceedings can be made on any damages as a result of the audit reports presented. Last but not least ASIC (Australian securities and Investments commission) must be notified that on reasonable basis the auditor suspects of unduly influence, manipulation or coercion.
Law reforms regarding third party liability clause
Third parties can be influential on financial statements report in the sense that they have no automatically imposed statutory obligations. Third parties may give false impression to the directors on the financial statements to give misleading interpretation. The absence of statutory functions may lead the third parties into giving false ideas to the auditors which can really damage the auditor’s report. However the information from third parties may be valuable but withheld by auditors due to lack of evidence. This can be damaging to the company. Recent reforms has seen third party credibility being considered to a certain extend. This is through promoting public policy debate to ensure reliable decisions are attained. Therefore statutory policies must be put in place to give full credit to some third parties like the customers and creditors who might give reliable facts about the status of the company. Though, care should be exercised by auditors when giving their own opinion.
This report gives a comprehensive and definitive analysis of the law of professional liability in Australia. The law gives empirical direction to requirements of audit firms, regulations and implementation of CLERP 9 Act towards insulating both the business people and the audit firms from unnecessary loss as a result of economic change. The report also provides circumstances under which an audit firm may have a limited liability in case of abrupt change in the economic status of a country.
AWA Ltd v. Daniels (1993) 9 ACSR 383, p. 386)
Australian Stock Exchange, Ltd., Listing Rule 3.1 (2004); Corporations Act, 2001
CLERP 2002, P. 27
Corporations Act 2001
HIH Royal Commission Report, 2004
Institute of Chartered Accountants (ICA), 2007, Audit and Assurance, Institute of
Limited Liability Act 1855, 18 & 19 Vict, c 133
S. Walmsley, A. Abadee and B Zipser, (2002) Professional Liability in Australia Thomson
Stephen Bottomley, (2002) Governance and accountability: a legal approach to auditing
The Companies Act 1896 (Vic)
 According to the HIH Royal Commission Report, under-reserving was the major
cause of HIH’s collapse
 HIH REPORT (describing HIH’s re-entry into the Californian workers’ compensation market as “a debacle” costing the group approximately a$620 million).
 According to the Royal Commission Report, the FAI Insurance acquisition resulted in a loss to HIH of approximately a$590 million.
 Australian Stock Exchange, Ltd., Listing Rule 3.1 (2004); Corporations Act, 2001,
$ 674 (Austl.).
 These legislative reforms include the Sarbanes-Oxley Act, Pub. L. No. 107-204, 116 Stat. 745 (2002); FINANCIAL REPORTING COUNCIL, THE COMBINED CODE ON CORPORATE GOVERNANCE (2003) (U.K.), http://www.asb.org.uk/documents/pagemanager/frc/combinedcodefinal.pdf [hereinafter U.K. COMBINED CODE]; Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act, 2004 (Austl.) [hereinafter CLERP 9 Act].
 Limited Liability Act 1855, 18 & 19 Vict, c 133
 This Act was often referred to as ‘Haines’ Act’ after the Colonial Secretary who presented it to the Legislative Council: see Birrell, above n 42, 36.
 In Australia, the audit requirement also applies to other corporate entities such as managed investment schemes. It does not apply to small proprietary companies unless this is required by at least 5% of the voting shareholders (Corporations Act, s. 293).
 The Companies Act 1896 (Vic)
 Street CJ in Eq in re Castlereagh Securities Ltd ( 1 NSWLR 624, p. 638)
 Section 307A
 AWA Ltd v. Daniels (1993) 9 ACSR 383, p. 386)
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