The relationships between audit failure, judicial fault-finding and the
availability of professional indemnity insurance have been debated by legal and
accounting writers in both academic and professional circles. This paper adds an
historical perspective to the current literature by presenting a review of cases
involving allegations of auditors’ negligence over a fifty year period
starting with the first significant case involving the question of
auditors’ duties. Amateur auditors who failed to carry out a proper
audit could expect little sympathy in the professional press but when large law
suits were brought against recognised accountants, the profession was forced to
consider the risks of the consequences of adverse judicial decisions. It was not
long before practitioners sought to manage those risks through professional
indemnity insurance. However, we find no evidence that the availability of
insurance increased auditors’ risk by opening the floodgates of litigation.
Anderson, M.
,
Edwards, J.R.
and
Matthews D.
, (1996),
“A Study of the Quoted Company Audit Market in 1886”
, Accounting, Business and Financial History, Vol.6
No.3, pp.
363-387
.
2.
Arnott, R.
and
Stiglitz, J.
, (1990), “The Welfare Economics of Moral
Hazard”, in
Loubergé, H.
(ed.), Risk, Information and Insurance,
Boston: Kluwer Academic Publishers
, pp.91-121.
3.
Barrett, A.R.
, (1894),
“The Era of Fraud and Embezzlement: Its Causes and Remedies”
, Arena, October, pp.
196-204
.
4.
Beck, U.
, (1999), World Risk Society,
Cambridge: Polity Press
.
5.
Bernstein, P.L.
, (1996), Against the Gods: The Remarkable Story of
Risk,
New York: John Wiley & Sons
.
6.
Blaug, M.
, (1997), Economic Theory in Retrospect, fifth
edition,
Cambridge: Cambridge University Press
.
7.
Borch, K.
, (1990), Economics of Insurance,
Amsterdam: North-Holland
.
8.
Brown, R.G.
, (1962),
“Changing Audit Objectives and Techniques”
, Accounting Review, October, pp.
696-703
.
9.
Chandler, R.A.
, (1997),
“Taking Responsibility: The Early Demand for Institutional Action
to Define an Auditor’s Duties”
, International Journal of Auditing, Vol.1,
No.3, pp.
165-174
.
10.
Chandler, R.A.
,
Edwards, J.R.
and
Anderson, M.
, (1993),
“Changing Perceptions of the Role of the Company Auditor, 1840-1940”
, Accounting and Business Research, Vol.23,
No.92, pp.
443-459
.
11.
Clayton, G.
, (1971), British Insurance,
London: Elek Books
.
12.
Cooper, E.
, (1886),
“Chartered Accountants as Auditors of Companies”
, The Accountant, 13 November, pp.
644-649
.
13.
Cooper, E.
, (1921),
“Fifty-seven Years in an Accountant’s Office”
, The Accountant, 22 October, pp.
553-563
.
14.
Davies, M.
, (1989),
“The End of the Affair: Duty of Care and Liability Insurance”
, Legal Studies, Vol.9, pp.
67-83
.
15.
De Paula, F.R.M.
, (1914), Principles of Auditing,
London: Sir Isaac Pitman & Sons Ltd.
16.
Dicksee, L.R.
, (1892), Auditing: A Practical Manual for Auditors,
London: Gee & Co
.
17.
Edwards, J.R.
and
Webb, K.
, (1985),
“Use of Table A by Companies Registering under the Companies Act 1862”
, Accounting and Business Research, Vol.15,
No.59, pp.
177-196
.
18.
Faure, M.
and
Hartlief, T.
, (1998),
“Remedies for Expanding Liability”
, Oxford Journal of Legal Studies, Vol.18, pp.
681-706
.
19.
Humphrey, C.
,
Moizer, P.
and
Turley, S.
, (1993),
“The Audit Expectations Gap in Britain: an Empirical Investigation”
, Accounting and Business Research, Vol.23,
No.91A, pp.
395-411
.
20.
Jones, E.
, (1981), Accountancy and the British Economy 1840-1980,
London: Batsford
.
21.
Lobban, M.
, (1996),
“Nineteenth Century Frauds in Company Formation: Derry v. Peek in Context”
, The Law Quarterly Review, April, pp.
287-334
.
22.
Lunney, M.
, (1995),
“Insurance and the Liability of the Legal Profession: A Case Study”
, Legal History, Vol.16, pp.
94-106
.
23.
Markesinis, B.S.
and
Deakin, S.F.
, (1994), Tort Law, third edition,
Oxford: Oxford University Press
.
24.
Nairne, W.H.
, (1896),
“The Present Position of Accountancy in View of Recent Legal Decision”
, The Accountant, 21 March, pp.
228-237
.
25.
Napier, C.
, (1998),
“Intersections of Law and Accountancy: Unlimited Auditor
Liability in the United Kingdom”
, Accounting, Organizations and Society, Vol.23,
No.1, pp.
105-128
.
26.
Parsons, C.
, (2000),
“Directors’ and Officers’ Liability
Insurance: A Target or a Shield?”
, The Company Lawyer, Vol.21, No.3, pp.
77-86
.
27.
Pittaway, D.
and
Hammerton, A.
, (1998), Professional Negligence Cases,
London: Butterworths
.
28.
Rejda, G.E.
, (2001), Principles of Risk Management and Insurance,
seventh edition,
Boston: Addison, Wesley Longman Inc.
29.
Reid, J.M.
, (1987),
“Judicial Intervention in Accounting Behavior: A Reevaluation of
the Nineteenth Century Experience”
, Journal of Accounting and Public Policy, Vol.6, pp.
9-34
.
30.
Robb, G.
, (1992), White-collar Crime in Modern England,
Cambridge: Cambridge University Press
.
31.
Sikka, P.
,
Puxty, T.
,
Willmott, H.
and
Cooper, C.
, (1993), Eliminating the Expectations Gap, Certified
Research Report No.28,
London: Chartered Association of Certified Accountants
.
32.
Spicer, E.E.
and
Pegler, E.C.
, (1925), Practical Auditing, fourth edition,
London: H.F.L. (Publishers) Ltd.
33.
Spicer, E.E.
and
Pegler, E.C.
, (1936), Practical Auditing, seventh edition,
London: H.F.L. (Publishers) Ltd.
34.
Stapleton, J.
, (1991),
“Duty of Care and Economic Loss: A Wider Agenda”
, Law Quarterly Review, Vol.107, pp.
249-297
.
35.
Stewart, D.
, (2001), The Audit of Tomorrow, Accountants’ Digest
No.442,
London: ICAEW
.
36.
Turner, H.A.
and
Alexander, E.V.C.
, (1987), The Principles of Marine Insurance: A Primer,
seventh edition,
London: Stone and Cox (Publications) Ltd.
37.
Woolf, E.
, (2004),
“Audits: Authentication or Self-Protection”
, Accountancy, August, p.
77
.
38.
Wright, C.
and
Fayle, C.E.
, (1928), A History of Lloyd’s,
London: MacMillan
.
