Chapter 4

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The forces that continue to cause audit firm to experince high rates of litigation are:

a) Liability doctrines that include joint and several liability statutes permitting a
plaintiff to recover the full amount of a settlement from an external auditing firm,
b) Class action suits and associated user awareness of the possibilities and rewards of
litigation,
c) Contingent fee-based compensation for law firms,
d) The misunderstanding by some users that an unqualified audit opinion represents
an insurance policy against investment losses

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- Breach of contract occurs when a person fails to perform a contractual duty. As an

example, an auditor was hired to find a material fraud. If reasonable procedures would
have detected the fraud and the auditor failed to uncover the fraud, the auditor would
have breached the contract.
- Negligence is the failure to exercise reasonable care, thereby causing harm to another
or to property. The profession’s standards require that audits be conducted in
accordance with professional auditing standards, a failure to meet these standards
could be construedas negligence on the part of the auditor.
- Gross negligence is the failure to use even minimal care or operating with a “reckless
disregard for the truth” or “reckless behavior.” Expressing an opinion on a set of
financial statements with careless disregard of professional auditing standards is an
example of gross negligence.

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The creditor may claim that the auditor was inattentive and the creditor is the foreseen user or
that the auditor was totally negligent because of the irresponsible disregards of the due care

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The auditor can try to veryfy that the audit has not caused the loss of the investor. The
investor was aware that the financial statements are not correct before he purchased the stock
and the reduction in the prices of the stock is partly caused by the operating losses in the
succeeding period in the general reduction in theprices on the stock market. The auditor could
have also tried the cover that the investor was not the foreseen used by the foreseeable user.
Also,the auditor could use the defense that scienter was missing whether the action was taken
under the act

And then the attitude that the auditor must take is to communicate it with management and
ask management to make corrections or request proof of the transaction / data / additional
information. Companies on the other hand, are expected to be able (especially "willing") to
use qualitative considerations in assessing a misstatement - as well as quantitative.

So it might be possible to recover the losses incurred.

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