Part 1 I Understanding Professional Responsibility & Liability I Chapter 4 I Live Class

Описание: Chapter 4 – Professional Responsibility & Liability

This chapter is one of the most practical and critical areas for accountants and auditors. It helps you understand not only what your professional duties are, but also the legal and ethical consequences when those duties are not fulfilled.

1. Meaning of Professional Responsibility

Professional responsibility refers to the duties and obligations a professional accountant or auditor owes to various stakeholders, including:

Clients/employers – providing competent, objective, and diligent service.

The public – upholding integrity and protecting the public interest.

The profession – maintaining high standards that sustain trust and credibility.

In practice, this means accountants are expected to act with due care, independence, integrity, and confidentiality, as guided by the ICAN Code of Ethics (aligned with IFAC/IESBA).

2. Professional Liability

Liability arises when a professional fails in their duty, causing harm or loss. Liability can be:

Civil Liability – When a client or third party suffers a financial loss due to negligence, misstatement, or breach of contract.

Example: If an auditor fails to detect material misstatements due to lack of due diligence, shareholders may sue for losses.

Criminal Liability – When actions involve fraud, misrepresentation, or violation of law (e.g., Companies and Allied Matters Act, Financial Reporting Council Act, or tax laws).

Example: Knowingly signing off false financial statements.

Disciplinary Liability – Breach of ICAN rules or professional ethics, leading to sanctions, suspension, or withdrawal of membership.

3. Key Areas of Responsibility for Auditors

Duty of Care: Exercise reasonable skill, care, and diligence expected of a competent auditor.

Duty of Independence & Objectivity: Avoid bias, conflict of interest, or undue influence.

Duty to Detect & Report Irregularities: While auditors are not guarantors of accuracy, they must design procedures to detect material misstatements, fraud, or non-compliance.

Duty to Confidentiality: Do not disclose client information except where legally required (e.g., money laundering, fraud reporting).

Duty to Report to Regulators: In Nigeria, auditors have responsibilities under CAMA, SEC rules, FRCN Act, and other regulatory frameworks.

4. Sources of Liability for Auditors & Accountants

Negligence: Failure to exercise due care, leading to financial losses.

Breach of Contract: Not fulfilling the agreed scope of work.

Misrepresentation: Providing false or misleading information.

Statutory Breach: Non-compliance with regulatory requirements (e.g., failing to qualify audit opinion when standards require).

5. Defenses Available to Professionals

Accountants can defend themselves against liability claims by showing that:

They exercised due care and complied with professional standards.

The loss was not caused by their work but by other factors (management fraud, unforeseeable events).

The claimant had no legal standing (no contractual or proximity relationship).

Liability was limited under the engagement letter (to the extent legally enforceable).

6. Limiting Professional Liability

While liability cannot be totally eliminated, it can be managed or limited by:

Drafting clear engagement letters that define scope, responsibility, and limitations.

Obtaining professional indemnity insurance.

Maintaining high-quality assurance procedures, documentation, and audit trails.

Continuous training to stay updated on laws, standards, and ethics.

7. Practical Examples & Case Law (Global & Local)

Caparo Industries v. Dickman (UK, 1990): Auditors were held not liable to investors at large but only to those with a close relationship (narrow duty of care).

Re Kingston Cotton Mill (1896): Auditors are “watchdogs not bloodhounds.” They must exercise reasonable care, not guarantee fraud detection.

Nigeria context: Under CAMA 2020, auditors must report on compliance and material misstatements; failure may result in penalties, removal, or litigation.

8. Impact on Students & Future Professionals

For ICAN students preparing for AAA/Case Study exams:

Always link responsibility → risk → liability in your answers.

Use examples (Caparo, Kingston Cotton, Nigerian laws).

Show practical judgment: how would you as an auditor balance your responsibility to the client vs. the public interest?

Conclusion

Professional responsibility and liability are not abstract concepts. They remind accountants and auditors that trust is their currency. Every audit opinion, financial report, or advisory service carries the weight of responsibility. Failure can lead to civil suits, criminal charges, or professional sanctions. Success, however, strengthens public confidence and adds value to the profession.

📌 Key Exam Tip: When answering questions, demonstrate awareness of both ethical duties (responsibility) and legal consequences (liability). Use scenarios to illustrate your point.