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ACCA Applied Skills · Corporate and Business Law (Global) · Other company officers

Harlow Co's auditor, Ms Vance, issued an unmodified opinion on financial statements which she negligently failed to discover were materially overstated. Ortega, an investor who is not a shareholder, read the published accounts and bought shares in Harlow Co a month later on the basis of them. The accounts were prepared for statutory purposes and Ms Vance did not know of Ortega or of any intended purchase. Applying the general common law approach to auditor liability for negligent misstatement, which statement is correct?

Ms Vance is probably not liable to Ortega. Under the Caparo approach an auditor owes a duty to the company, not to potential investors who rely on statutory accounts to decide on share purchases, because foreseeability alone is insufficient without proximity and a purpose connected with the accounts.

  1. AMs Vance is probably not liable to Ortega, as an auditor generally owes no duty to a potential investor relying on statutory accounts for investment purposesCorrect
  2. BMs Vance is liable to Ortega because any reasonably foreseeable reader of published accounts is owed a duty
  3. CMs Vance is liable to Ortega because the accounts were public documents and negligence alone establishes liability
  4. DMs Vance is not liable to anyone, since an auditor owes a duty only to the company's directors

Explanation

Following the Caparo approach, statutory accounts are prepared so members can oversee management, not to guide purchases by outsiders or existing members dealing in shares. Foreseeability alone is not enough, so no duty arises to Ortega. The last option is wrong because the auditor does owe a duty to the company, and the third wrongly treats negligence alone as sufficient.

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