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Executive summary
This paper evaluates the issues with regards to the potential responsibility of the auditor,
especially in times of financial crisis or an economic meltdown that can result in detrimental
consequences. It also highlights the potential of class action that can be brought up against
auditors. It is a fact that financial crisis creates significant blow on the existence of an economy
as well as corporations. This also enhances the duty of auditors and other financial regulators.
Within this critical perspective, the nature of the auditing profession does come into question and
it also intensifies the public discontent with regards to the operations carried out by the auditors.
Moreover, most of this highly strong notion tends to go down due to the inherent memories of
the wide variety of corporate collapses that took place. They were stopped when a new financial
crisis arose. Within this pivotal aspect, the report elaborates the significant role of auditors and
highlights the importance of the auditor’s opinion with regards to the financial statements.
Contents
Executive summary ....................................................................................................................................... 2
1 Introduction .......................................................................................................................................... 4
2 The auditor’s responsibility in adverse financial conditions ................................................................. 5
2.1 Auditor’s opinion .......................................................................................................................... 5
2.2 Going concern ............................................................................................................................... 7
3 Inherent limitations of an audit ............................................................. Error! Bookmark not defined.
4 Managing exposure to liability.............................................................................................................. 9
4.1 Liability Limitation Agreements (LLA) ........................................................................................... 9
5 Conclusion ............................................................................................................................................. 9
6 Recommendations .............................................................................................................................. 10
References .................................................................................................................................................. 12
1 Introduction
From a historical perspective, the financial crisis of 2009 has been highly glorified as a result of
the consistently enduring discussion within the accountancy profession. Along with that, it also
highlights the relevant financial press that surrounds it for analyzing the inherent nature of the
rights, duties and liabilities associated with the auditor. Moreover, it also focuses on the
prospective risk that a potential lawsuit against auditors for the collapse or demise of a financial
institution will have a detrimental impact on their existence. One of the most prominent
examples in this regard has been the unfolding case of the historic bankruptcy of Lehman
Brothers (Christensen et al, 2015). Due to this reason, it is mainly due to the reference to such
infamous past scandals that individuals are able to better evaluate how dilemmas in the modern
era have gained significance and they have also spiralled down within a new cycle of growth and
development (Mügge & Stellinga, 2015). This research report highlights the financial regulatory
approach along with the liability of auditors and also integrates the notion of class action that
could be brought against auditors from their clients. By evaluating and analyzing the consistent
growth and developments that has been made with regards to the potential liability that auditors
face as a result of the global financial crisis, the study would provide an insight within the
evolving nature of the audit and policymaking along with the potential implications required for
for correcting certain highly pivotal aspects of the financial regulatory system along with the
limitations that are inherent with it. It is also pivotal with respect to the measures that
governmental and non-governmental institutions would be taking. However, it would also have a
significant influence on the time that is required for controlling the crisis associated with it. Not
only they are important in the short term but they are of significant importance in the long term.
Within the short term, they can help in finding ways through which confidence of the investor
could be restored. In the long term, it can help in solving problems that are associated with
modification of financial principles that would prove to be a guiding principle for reforming the
relevant standards (Mugge & Stellinga, 2015). This could relate to assuring accountability,
improving transparency, ensuring market regulation, ensuring financial markets integrity and
formulation of an opinion with regards to the financial statements and whether they can provide
a true and fair view of the firm’s financial statements. However, there are situations in which an
auditor is not able to provide any opinion with regards to the financial statements. Such scenarios
would arise where mission and vision of the company was not comprehensive or where the
financial statements failed to comply with the relevant financial standards (Tarca et al, 2013).
Within this scenario, if the auditor provides an adverse opinion, it would illustrate the fact that all
the matters within the financial statements would portray reality. In such a scenario, the
responsibility of the auditor is extracted from the importance of the true and fair view. Moreover,
the responsibility of the auditor may decrease or increase due to the occurrence of events within
a specific scenario. This can also be reflected within IAS 10 “Events after the balance sheet
date” (Walton, 2016). From a financial perspective, IAS 10 means “those events that are
favourable and unfavourable and arise between the financial statements have been prepared and
the date that they have been authorized to be presented. Within this scenario, there are two key
points to be noted: -
Providing evidence of conditions that existed when the financial statements had been
prepared (adjusting events that had lead to the preparation of financial statements)
Indications that the conditions had occurred after the financial statements had been
Within this pivotal standard, the manager evaluates the material significance of events before
deciding if it is essential for making any adjustment to the financial statements. Within this
scenario, it is difficult for the auditor to evaluate whether the true and fair value of the items
The importance of general principles that surround audit of financial statements has been
asserted in ISA 200 (Glaum et al, 2013). It states “The core objective of audit of financial
statements is allowing potential auditors to provide an opinion on the degree at which financial
statements would be prepared and whether they or not they comply with the relevant accounting
standards”. It is a fact that the audit of financial statements should be done with adherence to the
relevant procedures along with the relevant financial and legal standards. After the audit of the
financial statements, the report is signed by the auditor and sent to the company’s shareholders
(Dewing & Russell, 2004). Due to the fact that auditors are recognized as professional that are
held responsible for giving a true and fair view of an entity’s financial statements, they have a
significant amount of liability to assure that the statements reflect a true and fair view of the
company’s financial position. Whenever auditors are required to perform an audit, they are
levied with a great amount of responsibility primarily due to the terms of their audit engagement
the most fundamental issues that have surrounded auditors specifically when the global financial
crisis had initiated in 2007. Within this pivotal framework, firms are required to prepare financial
statements on the assumption that they would be able to continue in business for the foreseeable
future for a specifically defined period (Dewing & Russell, 2002). If an organisation intends to
close down its business operations after its reporting date, then this will certainly have a
significant impact on the overall value of the firm’s financial statements along with having an
alternate for the preparing of company’s accounts (Dewing & Russell, 2008). Within the
framework of the international auditing standards, it has become pivotal for auditors to evaluate
whether the notion of going concern has been associated with preparing and presenting the
financial statements that would adhere to the relevant accounting framework. However the
overall expectation for auditors and accountants to evaluate importance of going concern has
often been misunderstood and is directly interlinked with expectations. A similar issue arose in
November 2009 when the UK Financial reporting committee (FRC) had provided a substantial
level of guidance for evaluating and addressing the risks related to liquidity and going concern
that have been faced by financial institutions at the start of the credit crunch (Arnold, 2012). It is
still highly evident as an essential part of the essential inquiry that had been started in March
2011 being an essential proof of its ongoing potential despite of the potential stability of capital
practice is class action. From a theoretical perspective, class actions rest on a highly simple
business proposition. They can be defined as self-selected class representatives along with their
lawyers. They are supervised effectively by their court and could also represent various class
members through a group that is adequately well placed for overcoming individual rights of all
associated members (Drinnan & Campbell, 2015). Within this notion, interests could be
represented by persons and institutions not that are selected by constituencies for their life. The
issue of class action can also be integrated with this research as the core perspective of this study
is to assert the fact that the position of auditors within the financial arena is comparatively unique
when compared with other professions (Mügge & Stellinga, 2015). The reason for such a pivotal
opinion is based mainly on the inherent nature of audit along with the inability of the auditors for
controlling the task with respect to the claims that are associated with it. The exposure of
auditors along with the unlimited liability with respect to an extremely wide range of claimants
does exceed the sensitivity of this profession to a huge extent (Combarros, 2000). The type and
nature of risk involved in the project can certainly help in effectively distinguishing the liability
of the auditors from the different professions that are associated in this framework. This pivotal
issue was also raised by The International Federation of Accountants (‘IFAC’) with regard to
Statements’ (Christensen et al, 2015). It states that “when owed to the associated limitations of
an audit, there is a risk that some of the material misstatements that are related to financial
statements would certainly not be detected, even if the audit has been planned effectively”.
Companies Act 2006 for using the Liability Limitation Agreements (LLAs) as they can help
them to reduce the threat that derives from client litigation matters. From a theoretical
perspective, LLAs could be defined as clauses that have been built within the terms of a financial
engagement that would impose a limitation on the amount of compensation that would be
required from the auditor (in case of negligence). However, this agreement has to be approved on
an annual basis by shareholders and should also be upheld by judges whenever any adverse
Although this scenario may sound straightforward on paper but it does have inherent limitations
associated with it. One of the core limitations comprises of how to elaborate the cap limit.
Another inherent issue with it is to decide what would be reasonable and fair whenever
shareholders or company directors have to set the terms of the engagement as this could only be
done after litigation has been brought into consideration (Cooper et al, 1998), It is only open to
3 Conclusion
The research has certainly revealed some pivotal attributes with regards to auditing and
accountancy. With regards to the audit of financial statements, the most pivotal factor is to
evaluate and analyze whether the financial data has been appropriately recorded and it reflects
the financial scenario in a correct manner. For having a thorough understanding of the financial
statements, it is essential that the auditor must have comprehensive experience with regards to
interpretation and collection of data. Within this pivotal scenario, the transparency of financial
statements would be scrutinized along with the auditor’s accountability. Such an objective would
only be achieved if there has been an establishment of a strong and binding relationship between
all the associated stakeholders. It is pivotal for auditors that the audit of the financial statements
has been done with adherence to all the rules and regulations of relevant accounting standards.
This would call into question very few elements that would raise any question with regards to the
4 Recommendations
From the perspective of class action, it is difficult to integrate class action within an
individual based legal system. The difficulties along with the extra administration
associated with the work does place several obstacles for the claim to be successful. The
fact should be noted that auditing and producing a comprehensive set of financial
statements within this highly complicated global economy has been a technique that
relies mainly on judgments that would arise from experience along with having a highly
essential to note that an audit of financial statements does require a huge amount of
judgment, decision making and subjectivity than it can ever be recognized. To avoid any
potential class action that could be brought against them by clients, auditors should be
liability of the auditor. Due to the fact that financial audits tend to be carried out by
commercial and retail organizations, the overall extent of the liability of an auditor would
certainly matter a lot to audit firms as it does significantly affect the extent to which the
profitability of the firms is affected in this regard. Within this pivotal framework, a low
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Drinnan, R., & Campbell, J. 2015. Class action risk: Now and in the future. Governance
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