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Auditors in Australia are subject to a wide range of laws, from contract law to common law and statute (Harlow 1995p.54). Their conduct is also regulated by various professional bodies, including the Institute of Chartered Accountants in Australia (ICAA) and CPA Australia. The government plays its part in regulating auditors through its agencies like Australian Securities and Investment Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC). The common law tort of negligence imposes a duty of care on auditors. Holding auditors liable requires one to prove that a breach of duty occurred, and that the breach caused damage within the context of the case (Harlow 1995).
According to Hodgson et al (2007), the standard of care requires auditors to apply a certain level of skill and care in the professional services they offer. This duty came into place following Pacific Acceptance Corporation Ltd v Forsyth. For a plaintiff to make a successful negligence claim there must be proof that the auditor acted carelessly and failed to meet the required standard of care. If an auditor (defendant) is found liable for negligence, the law of restitution entitles the plaintiff to damages payments to recover losses. For cases involving third parties, like directors of a company, the plaintiff’s damages entitlement will be reduced (Mitchell et al 2010).
In the case of Esanda Finance Corp Ltd v Peat Marwick Hungerfords, auditors’ scope of liability was effectively narrowed when the High Court denied a claim by third parties against the auditors for negligent misstatement (Lunney and Oliphant 2003p.117). The plaintiff finance company had suffered a loss after using audited reports prepared by the defendant. The reports were used to approve loans to the defendant’s client company. The court found in favour of the defendant and held that the auditor’s intention was not for the financier to use the audited accounts. Therefore, even though the auditors knew that the reports did not represent the company’s accurate financial position, the reports they prepared were not meant for the .............
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