Abstract
Auditors are occasionally sued for their failure to detect fraud in the client firm during an audit. These lawsuits are typically grounded in professional negligence, negligent misrepresentation, fraud, aiding and abetting fraud, or federal securities fraud. The PCAOB recently promulgated AS 2401, “Consideration of Fraud in a Financial Statement Audit,” which contains fraud-related Generally Accepted Auditing Standards (GAAS) applicable to audits of publicly-traded entities. An auditor’s failure to comply with GAAS may be evidence of professional negligence. U.S. states are divided as to whether an auditor’s averment of compliance with GAAS in an audit report is a statement of opinion or a statement of fact. An auditor’s failure to investigate evidence indicating potential fraud is one factor used to determine an auditor’s legal liability. An auditor may be able to use the doctrine of in pari delicto as a defense if the plaintiff is also a wrongdoer.
Highlights
Auditors are occasionally sued for their failure to detect fraud in the client firm during an audit
These lawsuits are typically grounded in professional negligence, negligent misrepresentation, fraud, aiding and abetting fraud, or federal securities fraud
Deloitte’s Motion For recognize evidence of potential fraud (“red flags”) uncovered Summary Judgment was granted, without prejudice.70 during the audit, or failure to respond to them if they are The in Pari Delicto Defense discovered, may be sufficient to establish auditor liability
Summary
Negligent Misrepresentation against an auditor for allegedly failing to detect a client’s. Deloitte’s Motion For recognize evidence of potential fraud (“red flags”) uncovered Summary Judgment was granted, without prejudice. during the audit, or failure to respond to them if they are The in Pari Delicto Defense discovered, may be sufficient to establish auditor liability. For. The doctrine of in pari delicto mandates that the courts example, in the Anwar case, the auditor’s failure to respond to will not intercede to resolve a dispute between two red flags was sufficient to allege scienter in securities fraud, wrongdoers.. As a and shareholders of the company that employs miscreant matter of commercial reality, audits are performed in a client- agents to enjoy the benefit of their misconduct without controlled environment.” the plaintiff was suffering the harm” supported the doctrine’s application to bar unable to meet the very stringent pleading requirements for a corporation’s negligence claim against an auditor. auditor scienter in a securities fraud case. This ruling is intended to allow only innocent delicto will be inapplicable if the corporate directors are shareholders to recover damages, so the assessment of the innocent. relative fault of the wrongdoers is a factual question for the
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