For almost 20 years now, pursuant to a 1998 Supreme Court case, auditors have been largely shielded from liability for their work, if their corporate client goes bust because of fraud.
The reason is an old doctrine called “privity of contract.” This meant that the shareholders or bondholders did not have a right to sue, because they were not the client in the contract- the client was the corporation, and since it went bankrupt, it had no funds/ability to sue.
There may be an end run around this through the doctrine of negligence- i.e. that the shareholders and bondholders, and perhaps employees, were people or entities that would reasonably and foreseeably rely on the auditor’s work, and thus should be allowed to make a tort claim, as compared to a breach of contract claim, against the auditor for their lost investment.
There is a case pending before the Supreme Court of Canada that will test this scenario. It involved that famous Toronto theatre promotor Garth Dravinsky and this theatre production company Livent.
Stay tuned- if the Supremes decided to reverse the 20 year old precedent, the job of auditing will be fraught with more perils. One wonders if the CGA group who recently merged with the CA group to form the standard CPA accountant designation, will now regret jumping into waters that will be infested with commercial litigators fighting every significant corporate bankruptcy.