The auditor’s liability for audited financial statements

• DOI: 10.10520/EJC-1ac3387c44
• Published date: 01 April 2019
• Date: 01 April 2019
• Pages: 468-485
• Record Number: dejure_v52_n1_a27
• Author: Steven R. Firer

468 2019 De Jure Law Journal

The auditor’s liability for audited financial

statements

Steven R Firer*

B. Comm, B. Compt Hons, MBA, LLM, DBA, CA (SA)

Corporate law and financial reportingspecialist with Nexia SABT

SUMMARY

Two Supreme Court of Appeal judicial decisions have changed the manner

in which courts will have to view an auditor’s liability to third parties. The

first decision was written by Brand JA in Cape Empowerment Trust Limited v

Fisher Hoffman Sithole, where he held that a misstatement in the auditor’s

report by the auditor was grossly negligent but not wrongful. The auditor

was afforded immunity from liability for a negligent misrepresentation

which consisted of a misstatement in the audit report which rendered the

audit report “unusable” thereby defeating the purpose for the auditor’s

existence. This paper demonstrates that it is clearly wrongful for an auditor

to make negligent misstatements in his or her audit report, however it is

reasonably possible that the test for legal causation may render the auditor

immune from liability. The second decision was written by Navsa JA in

Axiam Holdings Ltd v Deloitte & Touche where he held that an auditor may

have a duty to warn a third party about the incorrectness of an audit report

even if the auditor is unaware of its incorrectness, and ignorant to whom

the warning must be made, if the third party can show that the auditor

ought reasonably to have known of the incorrectness. This paper

demonstrates that while an auditor has a duty to speak, such a duty cannot

exist without a third party to speak to.

1Introduction

Two Supreme Court of Appeal (SCA) judicial decisions have “set the cat

among the pigeons” when they have regard to the delictual liability of the

registered auditor (auditor)1 to third parties2 in South Africa. The first

decision was written by Brand JA in Cape Empowerment Trust Limited v

Fisher Hoffman Sithole,3 where he held that a misstatement in the

auditor’s report by the auditor was grossly negligent but not wrongful.

1 This paper is dedicated to those foremost authors in the field of delict you

know who you are. A gigantic thank you must go to Professor Jooste of the

University of Cape Town who wrote the first paper regarding the “silence of

the auditors”. As usual nothing in the law of delict can be written without

reference to words of Professor Johan Neethling, South African law is

deeply indebted to you.

1 As defined in s 1 of the Auditing Profession Act 26 of 2005.

2 S 1 of the Auditing Profession Act defines a “client” as: the person for

whom a registered auditor is performing or has performed an audit and a

“third party” as any person other than a client.

3Cape Empowerment Trust Limited v Fisher Hoffman Sithole 2013 5 SA 183

(SCA) Maya, Cachalia, Shongwe JJA and Swain AJA concurring.

How to cite: Firer ‘The auditor’s liability for audited financial statements’ 2019 De Jure Law Journal 468-485

http://dx.doi.org/10.17159/2225-7160/2019/v52a25

*

The auditor’s liability for audited financial statements 469

The contentious issue in this court case was that the auditor was afforded

immunity from liability for a negligent misrepresentation which

consisted of a misstatement in the audit report which rendered the aud it

report “unusable”. This paper demonstrates that it is clearly wrongful for

an auditor to make negligent misstatements in his or her audit report,

however it is reasonably possible that the test for legal causation may

render the auditor immune from liability.

The second decision was written by Navsa JA in Axiam Holdings Ltd v

Deloitte & Touche4 where he held that an auditor may have a duty to warn

a third party about the incorrectness of an audit report even if the auditor

is unaware of its incorrectness, and ignorant to whom the warning must

be made, if the third party can show that the auditor ought reasonably to

have known of the incorrectness. This decision raises the unsettling issue

of a representation by “silence”, which could extend an auditor’s liability

to a third party beyond what may be the generally perceived

boundaries.5 This paper demonstrates that while an auditor has a duty to

speak, such a duty cannot exist without a third party to speak to.

These two court cases have the ability to change the basis upon which

the delictual liability of the auditor is determined. For many years the

present writer and others have adamantly believed that a negligent

auditor is a wrongful auditor. These two court cases change this

perception dramatically.

2 The legal framework

The delictual liability of auditors to third parties has been regulated since

19516 by legislation, which differs from the common law position.7 This

is reflected particularly in the prescripts of section 46(3) of the Auditing

Profession Act 26 of 2005.8 Section 46(3) of the Auditing Profession Act

creates two significantly different requirements. First, section 46(3)(a) of

the Auditing Profession Act “limits”9 the auditors liability to third parties

who can prove: the auditor was negligent in expressing the opinion, or

making his or her report or statement; the third party relied upon the

opinion, report or statement; suffered loss as a result of the reliance; that

the auditor knew or reasonably could have been expected to know at the

time the negligence occurred that the third party would rely on the

opinion, report or statement. Second, section 46(3)(b) of the Auditing

Profession Act provides that if after the audit opinion was given, the

registered auditor represented to a third party that it was correct, while

4Axiam Holdings Ltd v Deloitte & Touche 2006 1 SA 237 (SCA) Howie P and

Jafta J concurring.

5 Jooste R “The Spectre of Indeterminate Liability Raises its Head” (2006)

SALJ 563.

6 Public Accountants’ and Auditors’ Act 51 of 1951.

7 Neethling Potgieter Visser Law of Delict (2015) 321.

8 Neethling 305.

9 S 46 of the Auditing Profession Act falls under the heading “Limitation of

liability”.