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  1. 1. 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 condition. 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 manner. 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. 2. (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 conditions. 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
  3. 3. 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 punish him. 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 Rs.2000. 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
  4. 4. punishment. 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