The Legal Liability of Third Party Advice in Australia in Light of Recent Developments

Abstract

The corporate collapses around the globe over the last few years have been highly publicized in academia, the professions and also in the popular media. An effect of this has been the recognition of the integral role of the auditor and its role in certifying the compliance of financial reports with relevant accounting standards and corporate regulations. In the forensic analyses of the collapses, part of the blame has been placed on the negligence of auditors based upon claims relating to conflicts of interests. These criticisms have not been ignored but have rather become a key element in the reactive legislation designed to improve corporate governance including the Sarbanes Oxley Act in the United States and the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act (CLERP 9) in Australia. In regards to the Australian context, CLERP 9 have expanded the duties of auditors and made them potentially liable to greater claims of negligence to third parties who have relied upon the advice or representation by the auditor altering the position in Australian law as provided for by the High Court in Esanda Finance. This expansion of duty became effective in July 2004, amidst a continuing debate of a statutory cap to auditor liability and a professional indemnity insurance crisis. Thus the government found itself in a position where it was necessary to balance the competing claims for greater auditor accountability against the threat of the profession declining audit engagements due to the threat of litigation and the potentially high quantum of damages that may eventuate. In response to this challenge the Government introduced provision in CLERP 9 which provided for proportionate liability arising from negligent misrepresentations leading to pure economic losses where an action is commenced under the heading of misleading and deceptive conduct. Further to this, the Government also legislated to allow a national approach on a statutory cap for auditor liability through the Treasury Legislation Amendment (Professional Standards) Act. The effect of these provisions in extending greater protection to auditors may have undermined the effectiveness of the auditor provisions in CLERP 9 and raises questions as to whether there is genuine intent to tighten the regulation of auditors in Australia or whether the provisions are more form than substance in the global trend for greater accountability and corporate governance.