 To Whom Auditors Should Owe Their Duties?Loganathan Krishnan ()
Chapter Chapter 4 in A Paradigm Shift of Auditors' Role, Duties and Liabilities in Malaysia, 2025, pp 93-137 from Springer Abstract: Abstract This chapter examines the scope of auditors’ duties, with particular emphasis on identifying the parties to whom these duties are owed. It is neither logical nor justifiable to confine auditors’ obligations solely to the company that engages them, nor would it be reasonable to extend such duties indiscriminately to all conceivable parties. Therefore, a principled and balanced approach must be adopted. The central aim of this chapter is to evaluate and determine the appropriate parties to whom auditors should be held accountable. Hence, this chapter argues in favor of a broader and more inclusive approach—one that recognizes the rights of parties who suffer losses due to reliance on audited financial statements. Expanding the circle of responsibility would compel auditors to exercise greater care, diligence, and professional competence in their work. Such an approach could serve as a preventive mechanism against future financial scandals and reinforce trust in audit practices. Historically, the regulatory trajectory in the United Kingdom reflects evolving attitudes toward audit oversight. The Joint Stock Companies Act 1844 first introduced a statutory requirement for companies to appoint auditors. Although this mandate was repealed in 1856, it was reinstated in 1900. However, the legislation did not delineate to whom auditors owed their duties—leaving the matter to judicial interpretation. Regretfully, over the past century, case law has shaped the legal position, albeit inconsistently. Courts have adopted varying approaches in different cases, leading to ambiguity and unpredictability concerning the extent of auditors’ responsibilities. While the contractual nature of the auditor–company relationship remains central—thereby excluding third parties from this privity of contract—this narrow view has increasingly come under scrutiny. A more effective approach is to examine the foundational nature of the relationship between auditors and third parties. Despite the absence of statutory provisions in the Companies Act 2016 explicitly establishing duties owed to third parties, the interests of such parties in auditors’ reports are undeniable. In commercial reality, regulators, investors, creditors, and potential shareholders often rely on these reports when making critical decisions. To summarily exclude third parties from legal protection is to disregard the realities of modern corporate reliance and the evolving public expectations of the audit function. Therefore, this issue should not be dismissed merely based on legal formalism. If properly reasoned through established principles—such as foreseeability, proximity, and reliance—the relationship between auditors and certain third parties may justify the imposition of a duty of care. This is especially crucial when third parties seek redress for losses suffered due to negligent audits. In light of these considerations, this chapter advocates for a nuanced expansion of auditors’ legal responsibilities—moving beyond the traditional corporate client and acknowledging the legitimate expectations of third parties who rely on the integrity of audited financial information. Date: 2025 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-95-0796-2_4 Ordering information: This item can be ordered from DOI: 10.1007/978-981-95-0796-2_4 Access Statistics for this chapter More chapters in Springer Books from Springer |
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