 Auditors’ Legal Position Under Law of Contract and Criminal LawLoganathan Krishnan ()
Chapter Chapter 6 in A Paradigm Shift of Auditors' Role, Duties and Liabilities in Malaysia, 2025, pp 185-198 from Springer Abstract: Abstract This chapter explores the legal position of auditors within the realms of contract law and criminal law. It critically examines the contractual relationship between auditors and companies, focusing on the nature and scope of their contractual obligations. It then turns to evaluate whether the imposition of criminal liability on auditors is sufficient to ensure accountability and deter misconduct. The overarching objective is to determine whether the duties and liabilities imposed under these branches of law are adequate to prevent auditors from becoming complicit in financial scandals. Essentially, the appointment of auditors is typically effected through the company’s Board of Directors (BOD), the general meeting of shareholders, or, in certain cases, the Companies Commission of Malaysia. This appointment is formalized by a letter of engagement, which establishes a professional contract for services, thereby creating a legally binding contractual relationship between the company and the auditors. Since a company is an artificial legal entity without consciousness or will, it acts through its agents—namely, the BOD, shareholders, and regulatory bodies—for the purposes of entering into such contracts. In fact, as auditors are remunerated by the company for the services they provide, it further reinforces the existence of a contractual relationship. This position was affirmed in Employers Corporate Investments Pty Ltd v Cameron (1977–1978) ACLC 40–365, where the court held that auditors owe contractual duties to the company by virtue of the engagement agreement. However, the statutory, common law, and contractual frameworks do not explicitly prescribe how auditing duties should be executed in terms of the auditor’s ethical conduct—particularly the requirement of honesty. These frameworks fall short in addressing situations where auditors knowingly misrepresent or conceal material facts in the course of their professional duties. As such, this chapter considers whether the imposition of a fiduciary duty on auditors is a viable and effective solution, particularly in ensuring that auditors act with honesty and integrity in discharging their responsibilities. The question of criminal liability for auditors has also been the subject of considerable debate, especially since the early 1990s, when concerns grew over the role of auditors in financial misstatements and corporate fraud. Criminal sanctions are particularly relevant in cases where auditors knowingly certify false information as accurate. As the scope of auditors’ responsibilities expands, legal systems must respond accordingly by clarifying whether and to what extent criminal liability can be imposed upon auditors for misconduct or gross negligence. Nevertheless, despite growing regulatory expectations and heightened public scrutiny, criminal actions brought against auditors remain relatively rare. This raises concerns about the effectiveness of current legal mechanisms in holding auditors accountable, especially considering the increasing complexity and risks associated with audit engagements. This chapter evaluates whether contractual and criminal laws provide a sufficient deterrent against audit-related misconduct. 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_6 Ordering information: This item can be ordered from DOI: 10.1007/978-981-95-0796-2_6 Access Statistics for this chapter More chapters in Springer Books from Springer |
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