Auditors play an extremely important role in the monitoring of financial records of companies. They are the final barrier of protection for all stakeholders in the company and as a result they are expected to perform their duties with the utmost care. In recent times it has become a more frequent occurrence that auditors are being held liable to compensate a company in which the auditor conducted an audit and failed to note irregularities of some sort, more specifically, the failure to detect fraud.

An important case regarding auditors’ duties and liabilities is Thoroughbred Breeders’ Association of South Africa v Price Waterhouse. This case dealt with a company which sued its auditor for breach of contract. The auditing firm had allegedly failed to realise in the course of a routine audit that the company’s own financial manager had been stealing from the company for a period of time. The court examined the contract between the parties and concluded that at the time it was common cause that the respondent would conduct its audit according to the accepted accounting standards and without negligence. The court found that according to the facts of the case the respondents had indeed been negligent in the performance of its duties, and therefore the respondent would be held liable for the damages suffered by the appellant.

The Auditing Profession Act (APA) sets out the duties of an auditor and allows an auditor to express an opinion on the financial statements only if the auditor exercises his/her duties in good faith and is satisfied, as far as is reasonably practicable, with the financial statements. Furthermore, the auditor is only to finalise his/her opinion if a ‘reportable irregularity’ has not been reported to the Independent Regulatory Board for Auditors. A ‘reportable irregularity’ is any unlawful act by a manager of a company who has or is likely to cause financial loss to the company, or commits frauds or theft, or breaches any duty owed by that person to the company.

When the issue of auditors’ liability arises, the APA determines that an auditor may be held liable by their clients or by third parties who suffer damages. An auditor may not be held liable until it is proven that his/her work was malicious, fraudulent or pursuant to a negligent performance of the auditor’s duties. When determining the amount of damages to be paid by the auditor, the court will take into consideration the extent to which the client or the third party may have been negligent.