A communique released by the Council of the Institute of Chartered Accountants, Ghana (ICAG) revealed that the questions on the lips of many accountants and non-accountants following the collapse of some seven banks are:

1. Why couldn't the external auditors of the affected banks pick up the "going concern" (profitability, liquidity and solvency) difficulty signals during the audit process?;

2. Does this amount to deceit and/or negligence?.

As a Chartered Accountant and a student of the law, it is only natural that my interest and biases will tilt towards issues of Contract, Tort, and Corporate Law. 

It is against this backdrop that I decided to explore the external auditors' civil liability if any, in light of the raging banking crisis. In exploring the civil liability of external auditors of the defunct banks, the following legal issues are set for determination:

1. Whether or not, the external auditors of the defunct banks, by failing to pick up the going concern difficulty signals during the audit process and devise a suitable qualification in their audit reports is in breach of their statutory, contractual and tortuous duties?.

2. Whether or not, the external auditors of the defunct banks, by failing to pick up the going concern difficulty signals during the audit process and devise a  suitable qualification in their audit reports amounts to deceit?

3. Whether or not, the external auditors of the defunct banks, by failing to pick up the going concern difficulty signals during the audit process and devise a suitable qualification in their audit reports amounts to negligence?

In resolving the above legal issues, the following rules are applicable:

Section 136 of the Companies Act of 1963, (Act 179) states in part;

(1) "The auditors of a company while acting in the performance of their functions under this Act are not officers or agents of the company, but

(a) "shall stand in a fiduciary relationship to the members of the company as a whole, and

(b) "shall act in a manner that faithful, diligent, careful, and ordinarily skilful auditors would act in the circumstances.

(2) "A provision, whether contained in the Regulations of a company, or in a contract, or in a resolution of a company, shall not relieve an auditor

 (a) "from the duty to act in accordance with subsection (1), or

 (b) from a liability incurred as a result of a breach of that duty"

In addition to the statutory duties of the auditor, common law provides two (2) main facets in respect of auditors' civil liability as in liability for fraudulent misrepresentation; and liability for negligent misstatement.

Fraudulent misrepresentation in addition to being a ground on which a contract may be set aside constitutes the tort of deceit. Although the word "fraud" bears a wide meaning in common parlance, its meaning in law is much narrower as a result of the decision of the House of Lords in Derry v Peak [1889] 14 App Case 337. In Derry v Peak (supra), Lord Herschell established the following three propositions in respect of fraudulent misrepresentation. The first is that there must be proof of fraud and nothing short of that is sufficient.  The second is that fraud is proved when it is shown that a false representation has been made knowingly or without belief in its truth or recklessly, careless whether it be true or false. Thirdly, if fraud is proved the motive of the person guilty of it is immaterial as espoused in Polhill v Walter (1832) 3 B & Ad 114,

The second facet in respect of the auditor's civil liability at common law is negligent misstatement. Lord Wright in Lochgelly Iron & Coal Co. v McMullan [1934] A.C. 1 P stated  " In a strict legal analysis, negligence means more than heedless or careless conduct, whether in omission or commission. It properly connotes the complex concept of duty, breach and damage suffered by the person to whom the duty was owing."

In Donoghue v Stevenson [1932] A. C. 562, Lord Atkin provided the first general rule for determining the duty of care in negligence. He stated inter alia that a duty of care is owed to all persons who are so closely and directly affected by one's actions and omissions that one ought reasonably to have them in contemplation as been so affected when one is directing one's mind to the act and omissions which are called into question. The test for duty of care which is currently regarded as definitive is that described by Lord Bridge in Caparo Industries plc v Dickman [1990] 2 AC 605: as foreseeability of harm to the claimant; proximity or neighbourhood between the claimant and defendant and it must be fair, just and reasonable to impose the duty of care in the situation.

In the period immediately after Derry v Peak(supra), it was thought that negligent misrepresentation was not actionable in tort because liability in tort arose only in cases of fraudulent misrepresentation  (Le Lievre v Goulding [1893]) 1 QB 491). However, this view was rejected by the House of Lords in Nocton v Ashburton [1914] AC 932. Although the House of Lords recognised that negligent misrepresentation could be actionable, they held that it was actionable only where there was a pre-existing contractual relationship between the parties or where the parties were in 'fiduciary relationship'. This restrictive approach prevailed in England as late as 1951 (see Candler v Crane, Christmas and Co [1951] 2 KB 164, but contrast the powerful dissenting judgement of Denning LJ). However,  in 1964 in Hedley Byrne v Heller [1964] AC 465, the House of Lords finally expanded the ambit of liability for negligent misrepresentation. Lord Reid set out the " special relationship" between the parties which could give rise to a duty of care in making statements. Although the requirements for a special relationship were fulfilled in Hedley Byrne  (supra), the disclaimer at the top of the reference meant that there could be no liability on behalf of Heller.

Having established that the defendant  (external auditors) owes the claimant a duty of care, the claimant must prove that the defendant has breached that duty. The general standard of care in negligence is the standard of the reasonable man as espoused in the case of Kite v Nolan [1982] 126 sol 821 In Blyth v Birmingham Water Works Co [1856] 11 Ex 781, Alderson B described the standard of the reasonable man this way:"Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do." In cases in which the state of technical knowledge and expertise may be involved such as in the fields of accountancy, medicine and law, the defendants' actions will be judged on the standard prevalent in the circumstances of the time as espoused in the case if Roe v Ministry of Health [1954] 2 WLR 915.

Moreover, for a claimant to bring a successful action in negligence, it is not enough to establish the duty of care and breach of that duty. The claimant must prove on the balance of probabilities that the breach caused his damage or loss.

Form the facts presented, the issues raised and the rules so far discussed, the following critical legal analysis can be made.

Per section 136 (1) (a) of Act 179 ( supra), it can be inferred that while in the performance of his duties under Act 179,  an auditor owes a duty of care to the members of the company as a whole. The implication of this provision is that for a member of the company to be successful in a negligence action against the external auditor, that member will NOT be required to establish that the auditor owes him a duty of care. In the instead, he will be required to establish a breach of duty and consequential damage.

Furthermore, section 136 (1) (b) of Act 179 ( supra) reveals that in addition to his duty of good faith,  an external auditor must display some degree of care and skill while in the performance of his duties under Act 179. The question then is: what is the standard of care and skill an auditor ought to display in the discharge of his statutory duties?. In response to this question, Professor L.C.B Gower, in the Final Report of the Commission of Enquiry into the Working and Administration of the Present Company Law of Ghana stated that subsection (1) of section 136 of Act 179 (supra) does not intend to codify the duties of the auditor in detail, that is better left with professional standards and practice. Also, In Roe v Ministry of Health [1954] (supra), the external auditors' actions and inaction will be judged according to the prevailing standards in auditing at the time the audit was conducted. The prevailing standards with respect to the conduct of statutory audit is that of International Standards in Auditing ( ISA) as set by the International Auditing and Assurance Standards Board (IAASB). These standards require that the auditor undertakes going concern review of the client operations to satisfy himself that the going concern assumption is reasonable and disclosures made by directors are adequate. The engagement partner who has the responsibility of committing the audit firm by signing the audit report is also required to undertake a going concern review of the client operations as part of the quality control review process If after pursuing all the above reviews and enquires, the auditor is still uncertain as to whether or not the company will remain a going concern, he is  required to devise a suitable qualification in his report.

From the above clarification, it stands to reason that:

1. A faithful, diligent, careful and ordinarily skilful auditor will perform adequate audit procedures and reviews to satisfy himself that the going concern assumption of the company is reasonable and disclosures made by directors are adequate;

2.  A faithful, diligent, careful and ordinarily skilful engagement partner before signing the audit report will undertake going concern review of the client operations as part of the quality control process.

3. A faithful, diligent, careful and ordinarily skilful auditor who is uncertain as to whether or not the company will remain a going concern will devise a suitable qualification in his report.

In light of the above analysis, the following conclusion is drawn:

1. A court presented with the facts as per the case of the defunct banks will most likely conclude that the external auditors of the defunct  banks, by failing to pick up the going concern difficulty signals during the audit process and devise a suitable qualification in their audit reports, the external auditors are in breach of their statutory, contractual and tortuous duties;

2. Breach of duty does not in itself constitute the tort of deceit. For a claimant to be successful in an action in deceit against the external auditors of the defunct banks, the claimant must establish that the external auditor(s) made a false representation to him, that the false representation was made knowingly or without belief in its truth or recklessly, carelessly whether it be true or false Deceit therefore, is a difficult matter to prove and it should not be alleged unless there are good grounds to believe that fraud has indeed been practised.

3. Breach of duty does not in itself constitute negligence . For a claimant to be successful in a negligence action against the external auditor(s) of the defunct banks, the claimant must establish that the external auditor(s) owe(s) him a duty of care, that the duty owed him has been breached by the external auditor(s) and that he has suffered damage/loss as a result of the breach.

 4. By virtue of section 136 (1) (a) of Act 179, "members of the company" are statutorily owed a duty of care by the external auditors, and as such they are NOT required to establish duty of care to be successful in an action in negligence.

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The writer is a Chartered Accountant and a Law Student at GIMPA Law School.