Auditors’ Duty and Liability Under Law of Tort

This chapter critically examines the legal framework governing auditors’ liability in tort, with a particular emphasis on whether aggrieved third parties may bring claims against auditors for losses suffered. It explores the foundational elements required to establish tortious liability, namely, the existence of a duty of care, a breach of that duty, and the resultant damage. Through a comparative lens, the chapter analyzes the approaches adopted by courts in the United Kingdom, Australia, Canada, Singapore, and New Zealand, offering valuable insights that may guide the development of Malaysian jurisprudence in this area. The chapter will also assess the evolving nature of auditors’ liability, including whether such liability can be attached, apportioned, capped, or contractually excluded, considering contemporary legal developments. A crucial component of this analysis involves exploring mechanisms through which auditors may proactively manage or mitigate their exposure to tort-based litigation. Although many Commonwealth jurisdictions have historically relied on common law principles to shape the law of tort, the influence of these principles has diminished over time, giving way to statutory reforms and alternative judicial reasoning. Thus, to gain a holistic understanding of auditors’ tortious liability, it is also essential to consider developments in non-Commonwealth jurisdictions, notably the United States, where auditors frequently face litigation risks in high-stakes commercial contexts. In Malaysia, the legal position concerning auditors’ liability in tort remains underdeveloped. The courts have addressed the issue in only a limited number of cases, and a detailed, principled framework has yet to emerge. As a result, there is significant uncertainty surrounding the extent to which third-party stakeholders—such as creditors, investors, or potential shareholders—can hold auditors liable for financial losses caused by negligent audits. Auditors are increasingly exposed to litigation risks, especially when auditing companies subsequently face financial distress or insolvency. In some cases, companies seeking to issue new shares appoint well-known audit firms to bolster investor confidence. This perceived endorsement, however, places auditors in a precarious position—effectively turning them into de facto insurers for the financial risks assumed by stakeholders. Such expectations amplify the likelihood of litigation, often involving complex claims and substantial damages. The rise in financial scandals globally has further exacerbated these risks. When stakeholders suffer losses—whether from poor investment decisions, fraudulent financial reporting, or corporate collapse—the blame is frequently directed at auditors. This has led to a significant increase in litigation against audit firms, particularly in high-profile cases involving audit failures.