Civil and Criminal Liabilities of Auditors

Civil Liabilities

Liability For Negligence of Assistants

An auditor is entitled to rely on the work performed by the assistants. But he should ensure that his assistants are not negligent and the audit is conducted with due care and skill. However, he will continue to be responsible for forming and expressing his opinion on the financial information.

Liability for Unaudited Statements

A chartered accountant may accept assignments other than his audit work. For example, a chartered accountant may accept to write the books of accounts and prepare the financial statements for a client. He may not have actually audited the client’s accounts.

However, since he has associated himself in the preparation of financial statements, there is every possibility of a third party to presume that he is the auditor of the company to which he had prepared financial statements and that the books of accounts were duly audited.

Liability under Consumer Protection Act

The following points should be borne in mind:

• The auditor gives his opinion or advice on payment of fees. Therefore, they come under the purview of Consumer Protection Act.
• If any chartered accountant gives opinion or advice contrary to the provisions of law or any opinion not supported by any judicial decisions, he may be called upon to compensate by paying damages for the loss suffered as a result of his opinion or advice.

Liability Under Companies Act

Under Section 477, the court may summon and examine the auditor (or any officer of the company) and order him to produce books or documents of the company that are kept under his custody. This power is enforceable only after the appointment of liquidator or passing of winding up order of the company.

When a company is wound up by the order of the court and if the Official Liquidator is of the opinion that a fraud has been committed and has made a report thereon, the court may examine the auditor (or any officer of the company) in public on an appointed day.

Misfeasance

Misfeasance implies breach of duty or negligence in the performance of duties.

The liability for misfeasance arises only if any loss is suffered due to negligence or breach of duty. If no loss is suffered due to misfeasance, liability does not arise. Action for misfeasance can be initiated within 5 years:

• From the date of order of winding up.
• From the first appointment of the liquidator or
• Of the cause of action having arisen, whichever is longer.

Liability for Negligence

An auditor is expected to perform his duties with reasonable care and skill. Of course, no person can promise to always use highest degree of skill and display extraordinary knowledge while discharging their duties.

An auditor is liable to the following persons for negligence while discharging his duties.

• To Third parties, if the auditor knows or had reasonable opportunity to know that he (the third party) is relying on the skill and judgement of the auditor.
• To his client, with whom he has contractual relationship.
• In case of Fraud, the auditor is liable to all persons

Criminal Liabilities of Auditors

If any person issues or signs any certificate relating to any fact which such certificate is false, he is punishable as if he gave false evidence. According to Sec.197 of the Indian Penal Code, the auditor is similarly liable for falsification of any books, materials, papers that belongs to the company.

Penalty for deliberate act of commission or omission section 448:

If any officer including auditor of the company deliberately make a statement in any return, report, certificate, balance sheet, prospectus etc. which false or which contains omission of material facts he shall be punishable with imprisonment for a  term not less than 6 months extendable to 10 years and fine not less than amount involved in fraud extendable to 3 times of such amount.

Penalty for falsification of books section 336: Any officer including auditor of a company which is being wound up, with an intention to defraud or deceive any person, destroys, mutilates, alters, falsifies any books, papers or securities. He shall be punishable with imprisonment for a term not less than 3 years extendable to 5 years and with fine not less than 1 lakh extendable to three lakhs.

Failure to assist in the investigation section 217 (6):

Where the central Government appoints an inspector to investigate the affairs of the company, it is the duty of the auditor to preserve and produce to the inspector all books and papers relating to the company. If an auditor fails to assist the inspector in investigation, he shall be punishable with imprisonment up to 1 year and with fine not less than twenty-five thousand extendable to 1 lakh.

Noncompliance by auditor with section 143 and 145:

If the auditor does not comply with section 143 and 145 regarding making his report or signing or authentication of any document and makes willful neglect on his part, he shall be punishable with imprisonment up to 1 year and with fine not less than twenty thousand extendable to five lakhs. In case an auditor knowingly or willfully with the intension to deceive the company or Shareholders or creditors or tax authorities, he shall be punishable with imprisonment up to 1 year and fine not less than 1 lakh extendable up to twenty-five lakhs.

Mis-statement in prospectus section 34:

Where an auditor makes false statement with material particulars in returns, reports, prospectus or other statements knowingly it to be false or omits any material facts knowing them to be false, he shall be punishable with imprisonment for a minimum term of 6 months extendable to 10 years