Auditors play a vital role in detecting financial fraud. Many fraudulent businesses would go unprosecuted if not for the work of auditors. Yet, auditors themselves can face civil and even criminal liability in the performance of their duties.
Steps can be taken to minimize auditor legal liability costs. Here is what every auditor should know.
Understanding Auditor Negligence
Auditors are typically responsible to two third parties: owners of the financial statements they audit and shareholders and creditors who rely on the accuracy of the statements to make business decisions.
For a third party to successfully sue an auditor, they must prove the following:
- The auditor owned a duty of care and breached that duty of care.
- The plaintiff suffered a real loss, and at least a casual connection exists between the auditor’s negligence and the plaintiff’s loss.
Protecting Against Auditor Legal Liability
While many auditor lawsuits are unjustified and unsuccessful, any lawsuit can be costly to an auditor both financially and professionally.
One way to minimize auditor legal liability is to carry accountants’ professional liability insurance. While this insurance cannot protect an auditor from being sued, it can cover the expense of a lawsuit.
Professional liability insurance can protect against lawsuits resulting from inaccurate advice, negligence, or misrepresentation. Every auditor should carry it.
