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Auditor Liability: Understanding the Risks

Potential Liabilities of Auditors

When an auditor signs off on financial statements, they take on a significant responsibility. But what happens if those statements are found to be incorrect or misleading? In this section, we’ll explore the potential liabilities of auditors to companies, shareholders, and third parties.

Liability for Audit Failures

The Civil Code (CC) provides for certain liabilities of auditors in relation to their audit work. These include:

• Failure to Perform Duties Properly: If an auditor fails to perform their duties properly and the financial statements they signed are incorrect, they may face liability (Article 401, CC).
• Involvement in Company Transactions: An auditor who is involved in a transaction with a company they audit may be held liable if that transaction results in harm to the company or its shareholders (Article 402, CC).
• Failure to Detect Irregularities: If an auditor fails to detect any irregularities or inaccuracies in financial statements and this failure causes any harm to third parties, including investors, they can also face liability.

Auditor Responsibilities

In addition to performing their duties properly, auditors have a responsibility to disclose information about which they have knowledge that is important for the preparation of financial statements (Article 405, CC). If an auditor fails to meet these responsibilities, they may be held liable.

Determining Liability

The liability of auditors is determined on a case-by-case basis. The audited accounts must be signed by at least one auditor and contain their audit opinion. If there are any irregularities or inaccuracies in the financial statements, the auditor’s responsibility can be triggered.