Problem
"A wrong audit can cause damage to shareholders in secondary markets or to buyers of firms or shares in primary markets. This happens especially if outside investors base their decision on the audit and buy overpriced company shares. Liability of auditors is liability for pure economic loss." Hans-Bernd Schafer
Discuss the above statement with reference to any future proposal to extend the auditors duty of care beyond its current scope.
• Rajesh LLP is a top ten accountancy firm and in March 2019 they were completing an audit of Druids Field Hotels Plc group accounts. Rajesh LLP had previously signed off the hotel group's accounts from 2015 to 2018 and stated that the hotel group was in sound financial health. In July 2019 the hotel group collapsed into insolvent liquidation.
Druids Field Hotels Plc had received loan funding from Belfast Bank Plc in the amount of £250 million. Belfast Bank Plc are now claiming that Rajesh LLP were negligent as it based its decision to continue with its £250m loan facility to Druids Fields Hotels Plc on the audited accounts. The bank claimed Rajesh LLP was negligent as it had failed to discover fraudulent overstatements of the hotel's true financial position. When the hotel group collapsed, Belfast Bank Plc was left with a debt it had little chance of recovering.
However, in the audit reports, Rajesh LLP had included a clear disclaimer that the reports were solely for Druids Field Hotels Plc and its directors and that Rajesh LLP held no responsibility to anyone else for its audit work. Belfast Bank Plc challenged its stance, arguing that such a disclaimer was unreasonable.
Task
Consider the above scenario in respect of the duties that are owed by an auditor to a company.