Auditor's Liability

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The auditor's liability is the specification of the obligation to pay damages in the event of culpable, i.e. slightly or grossly negligent, behavior by the auditor or in the (rare) case of intent on the part of the auditor in the event of a breach of duty within the framework of the statutory annual audit .

Problem

The examination of the annual financial statements by an auditor and, in particular, the issuing of an unqualified auditor's report is an essential basis for the decisions of the lenders , the shareholders and the general meeting in the discharge of the board of directors .

Errors in the audit of the annual financial statements therefore have far-reaching consequences for the groups of people mentioned. The audit is also very important for the trust of market participants in the reliability of the annual financial statements in general. Without a trustworthy final audit, markets only function with considerable risk discounts on the part of the participants. The final examination, if trusted, reduces transaction costs for all market participants.

Of course, auditors are not in a position to be liable for the objective correctness of the financial statements. You can only be held liable if you make your own mistakes during the test and damage is caused as a result. If the company withholds essential information from the auditors or if facts are misrepresented, it is possible that objectively incorrect annual financial statements will go undetected for a long time. In practice, there are incentives to deliberately falsify annual financial statements by members of the board of directors or management, mostly in the direction of increasing the reported profits. Incentives (bonus payments) or the personal ambition of those involved can contribute to this. Careful audit by experts is intended to reduce these risks.

Liability of the examiner only if the examiner breaches his own duty

Specifically, the auditor is threatened with liability if the principles of proper auditing are violated culpably, i.e. with slight or gross negligence (or - rarely - intentionally).

Damage can result if errors in the annual financial statements remain undetected as a result. As a result, the examiner is threatened with liability for damages.

Liability-related damage

The audited company does not immediately become "richer" or "poorer" through an error in the audit alone, so it does not immediately suffer any damage.

On the other hand, damage often occurs as a result of incorrect annual financial statements: B. if company money is distributed to shareholders and it can no longer be reclaimed. - Likewise, if a falsification of the balance sheet discovered late, incurs enormous costs for consultants and special audits. - Due to the (actually nonexistent) profits, employees receive bonus payments that cannot be reclaimed after the actual situation has been discovered. - In some cases, companies pay taxes on profits that do not actually exist but are incorrectly reported in the annual financial statements. These cannot always be reclaimed later. Even then, there is harm to society.

The board of the audited company prepares the draft of the annual financial statements. In all of the foregoing cases, the examiner cannot be blamed for the fact that the original design was incorrect. The auditor can only be criticized for the fact that an error was not discovered due to his breach of duty and the company is threatened with further disadvantages.

In particular, in the case of undetected errors, there is a risk that the persons involved, in the absence of detection, will continue to act, often with increasing criminal energy.

Sums of damage

Damage sums can have extremely high values ​​if the inspectors have fundamentally violated their inspection obligations.

Minor carelessness on the part of the examiner usually does not cause enormous damage. Because if a small claim in truth z. B. does not exist, the loss is not great. On the other hand, in the case of very large claims by the audited company (so-called "essential claims"), it is recognized worldwide that the auditors must check them very carefully. So if z. If, for example, there are cash balances in the amount of hundreds of millions in the annual financial statements, these must be checked very carefully. If this is not checked properly, the damage can actually be very high. In this respect, it is pointed out in the literature that typically the examiner almost never experiences a risk of unlimited liability because of the "small" examination errors. It is usually the fundamental examination errors that lead to major damage and for which there is a risk of high liability for damages later ( Walter Doralt, ZGR 2015, 281 ).

Limits of Liability

In some countries there is a legal limitation of liability for auditors, but most of them do not. Hardly anywhere is the legal limit for the auditor's profession as privileged as in Germany. In many countries, however, there is an obligation to take out liability insurance . In the EU there is a specific liability limitation for negligence in the statutory final audit in Austria, Belgium, Germany, Greece and Slovenia.

A Recommendation 2008/473 / EC of the European Commission dated June 5, 2008 had advised EU member states to introduce liability limitations in any of the various forms. The proposals were highly controversial in specialist circles (see Walter Doralt, Alexander Hellgardt, Klaus Hopt, Markus Roth, Reinhard Zimmermann, Auditor's Liability and its Impact on the European Financial Markets, Cambridge Law Journal Vol. 67, 62-68, 2008 ).

However, this was not pursued by the later European Commissions because this approach did not receive sufficient political support. No reaction to the recommendation was observed in the EU member states either. A piquant detail about the recommendation at the time was that the responsible EU commissioner belonged to the profession concerned, which the limitation of liability was supposed to protect, before the political career himself (as a chartered accountant - see https://en.wikipedia.org/wiki/Charlie_McCreevy ).

In any case, the recommendation of the EU Commission from 2008 can now be viewed as outdated. Even in the foreseeable future, it will hardly lead to new legal regulations that limit the liability of auditors.

Examples

In 2002 the US company Enron collapsed. As a result, it emerged that extensive falsification of the balance sheet had concealed the true situation of the company. The responsible auditing company Arthur Andersen paid € 40 million in a settlement and had to cease operations. This led to a general distrust of the quality of the final exam ( enronitis ) and the Sarbanes-Oxley Act , which the US government wanted to restore confidence.

In England in particular, accounting scandals have shaken confidence in the reliability of the audit in recent years. This concerned z. B. the cases of Carillon, BHS, Thomas Cook (see report in The Guardian ).

In Germany, too, the reliability of the statutory audit has been discussed again since the Wirecard case (see, for example, the Handelsblatt report ).

Legal situation in Germany

In Germany, the auditor's liability is regulated in Section 323 of the German Commercial Code. However, liability is limited by law. This is quite unusual in German law and constitutes a break with all otherwise established principles of contractual and tort liability of the BGB (legal limits occur, but usually only with strict liability). In fact, no other profession has achieved a comparable legal privilege. For this reason, too, the limit of liability has long been controversial in legal policy terms ( Doralt, ZGR 2015, 298 ff ).

Specifically, Section 323 (2) of the German Commercial Code (HGB) restricts the liability of auditors, the legal representatives of an auditing company involved in the audit and the auditor's assistants to 1 million euros if the person liable for compensation has acted negligently. When examining stock corporations that have issued shares with an official listing, this liability limit increases to 4 million euros.

Limits of liability in criticism

The limit of liability is highly controversial for several other reasons (see notes in Baumbach / Hopt, HGB § 323 Rn 9). It has existed since the statutory audit was introduced in 1931. After all, the amounts have been revised upwards several times, very moderately: Originally the limit was 100,000 Reichsmarks , most recently in 1998 by the KonTraG it was changed to the amounts currently still in force. The increase in the amount of liability is intended to reinforce the trust placed in the audit due to the increased threat of sanctions. After the Wirecard case, it seems questionable whether this was successful.

The limit is heavily criticized in specialist circles, primarily because of its insufficient height. This is actually disproportionately low.

The problem is also exacerbated by the ever increasing importance of the final examination. In a modern banking industry and in capital markets, it appears more difficult than ever to justify in the current dimensions.

Another aspect is that the claims of the injured party are unobjectively severely curtailed at this low level in the legal considerations. In addition, the low limit reduces the incentive for careful examination.

It is also interesting and noticeable that many other European legal systems have no legal limits for auditor liability (e.g. England). In others the limits are higher. This is particularly noteworthy because the audited companies are usually much smaller than the average German company (e.g. in Austria, where the limits are between 2 million and 18 million euros, depending on the size of the audited company) ). The German limits of Section 323, Paragraph 2 of the German Commercial Code (HGB) are all the more inadequate when comparing the law. See the comparison of the regulations in Europe in Doralt, ZGR 2015, 292 .

If, on the other hand, an error in the annual financial statements went undetected by the auditor, simply because a forgery was carried out particularly skillfully, but the auditor had checked carefully and was unable to notice the error during a normal audit, the auditor cannot reproach: the auditor is only liable for his own breaches of duty.

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