Global financial crisis may increase audit negligence claims
Auditors and the legal profession are very aware that the last Australian financial slump in the early 1990’s was accompanied by a wave of high profile cases against the auditors of failed companies or those which had been the victims of fraud, involving very large damages claims.
High profile corporate collapses resulted in audit negligence claims that have emerged during the recent crisis include Centro and Westpoint, while a case against the auditors of miner Sons of Gwalia was only recently settled. Currently, other auditors are under scrutiny in matters involving the Allco Finance Group, City Pacific, Bill Express and ABC Learning Group.
It can be expected that the GFC will continue to trigger similar audit negligence cases. As they come to a head, auditors and their legal advisors will need to be particularly vigilant in seeking expert advice, not only to help assess the validity of such claims, but also to assist in computing the extent of potential damages claims.
Deloitte’s specialist audit negligence expert witnesses have proven instrumental in helping both plaintiffs and defendants in such actions.
The role of the expert witness
Accountants work closely with lawyers as expert witnesses and/or shadow experts in audit negligence claims. Close co-operation between forensic accounting and legal professionals contributes significantly towards cost reduction and effective case management.
To be most effective, expert witnesses (or shadow experts) should be consulted at the earliest possible time. Experience shows that early assessment:
- Manages expectations. An early expert assessment of the negligence issue and the strengths and weaknesses of the auditors’ position is very helpful in ensuring that the expectations of both the clients (whether plaintiff or defendant) and their lawyers are realistic. This is especially important because cases of this nature are often very emotional for both the auditors and the clients involved whereas the negligence issues can be highly technical.
- Establishes a “common sense” framework. A preliminary assessment of the damages likely to be assessed against the auditor, even if found negligent, is important to establish a common sense framework for the case. In some cases, the likely extent of damages may cause reconsideration of the vigour with which the case is contested.
- Assists in establishing the databank of evidence. Often, the discovery process in an audit negligence case can result in mountains of data. In most cases, the relevant material will require to be electronically stored. Early advice of an expert will assist in the determination as to what needs to be stored and the format of the databank.
Typical expert reports in audit negligence matters are long and complicated. Adequate notice of deadlines and target dates for submission of reports will maximise the efficiency of your expert witness, particularly as their reports are regarded as high risk items requiring maximum internal review procedures which can be time consuming.
Similarly, once an audit becomes a matter of concern, the parties involved should seek specialist confidential advice as soon as possible.
Should you have any further questions, please contact Jennifer Exner Telephone:+61 2 9322 3875 or refer to our Deloitte Forensic Dispute Solutions website.
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