Re-examining the basis of auditors’ liability in Nigeria and the United Kingdom

Abstract

In Europe and North America, negligence claims against firms of accountants, solicitors and other professionals are increasingly common. The law of negligence is in constant development, as major cases come to trial and new statutes are enacted on the subject. The auditing function of accountants has attracted more attention in recent times because of the failings of international corporate brand names amidst allegations of fraudulent accounting, auditing and directors’ abuse of office. A legal response to these failings is an examination or re-examination of the rules on audit responsibilities, monitoring and the basis of liability for breach of statutory duties and negligent misstatements. This article examines the legal framework delineating auditors’ responsibilities and potential liabilities in the United Kingdom and under the Nigerian Companies and Allied Matters Act 1990, with a view to prescribing an approach that will ensure effective compliance and discharge of responsibilities owed to all persons who may conceivably rely on financial statements and the auditors’ certification of accuracy. It advocates a stricter regime of civil liability for auditors in meeting increasing challenges posed by several audit failures and scandals worldwide. The article submits that existing statutory framework for auditors’ liability needs to be supplemented and advanced by common law formulations. It argues that a legal regime, which absolves auditors’ liability in respect of a careless audit unless it so happens that the company itself suffers loss, is absurd. In reality, it contends that a company's annual report containing the financial statements of a company's performance as audited forms the bedrock of informed investment decisions by existing shareholders and prospective investors. For existing shareholders, it provides an analytical basis for the evaluation of the company and thereby influences the decision to sell or hold or even to make further purchases of the company's stock; moreover, for investment analysts, advisers and investors, it encompasses the most readily obtainable certified performance record of the company. Therefore, it is only reasonable that it will be relied upon by professional advisers and ultimately in investment decisions. To limit the relevance of financial statements to its ‘accountability role’ for existing shareholders, as presently formulated in the United Kingdom, is a narrow conception of the effect of audited financial statement.