Auditors - duty of care

As is well known, in order to sue for professional negligence, it is necessary for the plaintiff to show that 3 things -

• a duty is owed by the defendant professional to the plaintiff;
• the defendant breached his duty of care; and
  
• damage or harm is caused to the plaintiff.

This post will examine the concept of duty of care being owed by auditors and accountants. A duty of care by a defendant to the plaintiff is owed when it is forseeable that harm may be caused to the plaintiff by the defendant's carelessness (what is sometimes called "the neighbour principle"). In plain English, this means that one can predict that if the professional is careless, the plaintiff might in some cases suffer harm. This area of law is complicated due to the courts also considering public policy and fairness, but that is a discussion for another day. In addition, suing for negligent words whether they are written or oral is also more complicated than suing for negligent actions.

What this post aims to do is to mention the leading case of Caparo Industries v Dickman [1990] 2 AC 605, a decision of the House of Lords, England's highest court. This case has been accepted by the Singapore courts. The court held in this case that auditors owe no duty of care to company shareholders in respect of the statutory audit. This means that any lawsuit brought by shareholders of a company against an auditor who is alleged to have performed a negligent audit of the company or given a negligently incorrect audit report is sure to fail. This only applies where the audit is the statutory audit required by the statutes relating to companies (the relevant statute in Singapore would be the Companies Act).

In the above case, the plaintiff was a shareholder who claimed that it had relied on the audit report relating to an investee company which it received, and based on this, proceeded to take over control of the company. The court dismissed the case on a preliminary issue without even deciding whether or not the auditors were careless, since the plaintiff had failed to establish duty of care, its lawsuit stood no chance of succeeding.

It should be noted that a shareholder could sue an auditor where the auditor is specially hired, eg for a due diligence audit - often used where the shareholder is planning to buy over the company. The shareholder could sue in contract law or in tort law.