Auditor’s Liability :
Auditor of a private institute is not appointed under any Law. He is
appointed by an agreement with the client. So, his liabilities are decided on the
basis of instructions given by the client. It is advisable for the auditor of private
institute to get instructions of the client in writing so that there will be no
confusion regarding the work done by him in future.
Company auditing is different from this. He is appointed according to the
Indian Companies Act of 1956 and his liabilities are showed in the law. His
liabilities can be described under two heads :
1. Civil Liability :
(A) Liability arising from negligence
(B) Liability arising from misfeasance
(A) Auditor’s civil liability regarding negligence :
As auditor is appointed by the company, it becomes auditor’s duty to
protect the interest of the company. Moreover, as auditor represents shareholders,
it becomes prime and sacred duty of an auditor to maintain the trust of
shareholders. In order to fulfil his duty faithfully auditor should use care – skill.
Of course, it is difficult to define fair care – skill and it is again difficult to define
it or measure it. It can be decided on the basis of form, type of the case or
Prapared by Prashant Parmar B.COM. (SEM-VI) AUDITING
If the auditor fails to do his duties, he should be ready to suffer its results.
It means, he should pay for the losses suffered by the client.
Here, it should be remembered that auditor has to pay for the losses of the
client only if the loss occurs because of his negligence to his duties. But if he
owner has not suffered any losses because of auditor’s negligence or auditor had
not been negligent and yet the client had suffered, in that case the auditor is not
liable to pay for it. This can be easily understood with the help of following
Loss without negligence
An auditor is not liable for
Negligence without loss
Moreover, if the client has really suffered losses because of the negligence
of the auditor, only the company has the right to file a suit for the recovery of
damages, individual shareholders cannot claim. Of course, if the company is
making losses, its liquidator can file such suit.
Following cases regarding this are famous :
(1) Leeds Estate Building and Investment Co. vs. Shaepherds (1887)
(2) The Irish woolen Co. vs. Tyson and Brothers (1900)
(3) London Oil storage Co. vs. Seer Hasluck and Co. (1904)
(4) Registrar of Companies (Mumbai) vs. Hedge (1954)
Q.4 Discuss auditor’s liabilities to misfeasance as per Companies Act.
(Sau. Uni. ’81, ’84 , ’86 , ’92 , ’94 , South G.U. 2001, 2004, B.U.2004)
Ans . As Auditor is considered liable for negligence, in the same way, he can be
found liable for misfeasance also. As the representative of shareholders, auditor
should protect the interests of shareholders and for this auditor should take
proper care and use his skill and expertise. Even then, if auditor does not follow
his duty properly, means if he commits misfeasance, auditor is liable for this. If
company has suffered any loss because, of auditor’s misfeasance or breach of
trust, auditor should pay the damages.
When company becomes insolvent as per the provisions of Company’s
Act, court feels that founders of the company, management or officers (including
auditor) have misused the money of the Company or kept it in unauthorized
manner with them or they have committed misfeasance or breach of trust. In that
case the court can order such founders, management or officers to pay for the
loss company has suffer because of their breach of trust and misfeasance by
holding them liable.
Even then, if the suit is filed in the court against any officer of the
company (including auditor) for negligence, misfeasance etc. and if the court
feels during the hearing of the case that –
(1) He may be liable or not; or
(2) They had acted fairly an honestly; or
(3) On overall consideration of all the circumstances of case and
circumstances under which he was appointed, if he is found worth absolving
from the allegations, the court gives total or partial freedom under certain
When auditor gets the idea that a case is going to be filed against him for
negligence, breach of trust or misfeasance, before the case is filed, auditor can
make himself free from such liability by sending an application to the court and
if the court finds it proper, it can make the auditor free from such responsibility.
Prapared by Prashant Parmar B.COM. (SEM-VI) AUDITING
According to the provisions of Companies Act, any company cannot keep
the auditor free from liability of negligence, breach of trust or misfeasance by its
articles or agreement. If there has been any provision or agreement has been
made, as it is against Companies Act, it is considered null and void.
Yet, in certain circumstances civil or criminal liability of auditor is
created, company can give relief to the auditor under the following conditions :
(1) Judgement should be in favour of the auditor; or
(2) Auditor should have been declared innocent; or
(3) The court must have given relief the auditor according to the provisions of
Section-633 of Companies Act.
If auditor has made any false statements in the prospectus inviting the
public to invest in shares or debentures, as an expert, auditor is considered liable
for it. Moreover, if any person has purchased share, debenture on the basis of
such false statements and if he has suffered loss, auditor is liable to pay for it.
But if auditor withdraws his statements before the issue of prospectus is out, he
becomes free from the liability. Famous cases regarding this are given bellow :
(1) London and General Bank Ltd.
(2) Kingston Cotton Mills Company Ltd.
(3) The City Equitable Fire Insurance Company Ltd.
(4) The Westminster Road Construction and Engineering Company Ltd.
Q.5 Discuss adutior’s criminal liabilities under the Indian Companies Act.
(Sau. Uni. ’81, ’83 , ’89 , ’92 , ’93 , ’96 , ’98, 2006)
Write Short Notes :
Auditor’s Criminal liability. (Sau. Uni. ’96)
Ans. Criminal liabilities :
Auditor is an officer of the company and if he breaks the provisions of
law. It is known as criminal liability of the auditor. For this, auditor is liable to
fine or punishment. Regarding auditor’s criminal liability, various provisions of
Companies Act are as follows:
According to Section-63 of Companies Act, if a prospectus is issued by the
company containing false statement, every person including auditor who
authorized the issue of such provisions in section 68 of the Companies Act, to
Contrary to the provisions of Section-233 of Companies Act, if any auditor
gives report or certifies documents of the company, auditor or any other person
who has signed the report or any one who was certified documents does this
intentionally, he is liable for fine upto Rs.1000.
According to Section-240 of Companies Act, the auditor should help the
inspector appointed by the Central Government. If auditor does not help him, he
is liable to be punished with imprisonment of six months and or with fine of
According to Section-242 of Companies Act, the Central Government take
necessary steps on the basis of the report by the inspector and if the suit has been
filed against the person related to the company, if the auditor does not help, it is
treated similar to contempt of court and the auditor will be held liable to
According to Section-477 of Companies Act, a Private Court can examine
the auditor when the company is making loss and the important documents
which are with the auditor should be submitted to the court if necessary. If the
auditor does not remain present in the court, he can be arrested