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John Mutiso bought shares of Sh.2 million six months ago in Kenya Company Limited which has since gone into liquidation. He intends to sue...

      

John Mutiso bought shares of Sh.2 million six months ago in Kenya Company Limited which has since gone into liquidation. He intends to sue XYZ & Co. Certified Public Accountants for the imminent loss of Sh. 2 million which he is likely to suffer. XYZ & Co. had audited the Kenya Company Ltd. The previous year and issued an unqualified report. John Mutiso claims that he solely relied on the audit report when he took that investment decision.

Required:
a) Do the auditors, XYZ & Co. have any liability to Mr. John Mutiso?

b) What circumstances must Mr. John Mutiso demonstrate if he has to succeed against the auditors?

c) State the measures XYZ & Co. should undertake to minimize potential liability for professional negligence.

  

Answers


johnson
a) NO:
A shareholder cannot sue the auditor individually if he relied solely on audited financial statements as a basis for investing in a company.
However the auditor could be liable if he knew that his report would be used to make investment decision „Hedley Byrne principle?

b) Mr. Mutiso must prove that: -
i) That XYZ company indeed carried out the audit work negligently
ii) That as a direct consequence of XYZ?s negligence he suffered financial loss
iii) That XYZ knew or ought to have known that the accounts will be relied upon for investment decisions by John Mutiso i.e prove that XYZ Co. owed him a duty of care.
iv) That Mr. Mutiso actually relied on the report. No other external auditors whatsoever influenced his decision making but just that of the audit report.


c) The auditor should ensure that he is competent enough to carry out the audit assignment in order to be able to carry it out according to the professional standards. He should also ensure that he actually conducts this audit in accordance to the standards set by both professional and ethical bodies and in utmost care. By doing so, he will be able to prove that the audit was not carried out negligently.

-The audit should be carried out in detail and every aspect of it taken seriously. If the information necessary in one area are unavailable. The auditor should obtain a letter of representation in order to
ensure that he makes an informed decision and he can be able to prove so, if the need arises.

-The auditor can enter into an agreement with his client that his report should not be used by another person apart from the client.

-Include a disclaimer of liability clause in the relevant document or report. Example of such a clause would be “ while every care has been taken in the preparation of this document, it may contain errors for which we cannot be held responsible”

-Taking professional indemnity insurance cover.
johnson mwenjera answered the question on March 28, 2018 at 07:51


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