The rights of individual stakeholders against negligent auditors have been even diluted legal cases.  During the early 1980s, court cases, such as JEB Fasteners Ltd v Marks Bloom & Co. [1983] 1 All ER 583 and Twomax Ltd v Dickson, McFarlane and Robinson [1983] SLT 98 indicated the possibility that under some highly restrictive circumstances auditors may be held liable to third parties. The subsequent court judgements in cases such as Caparo Industries plc v Dickman & Others [1990] 1 All ER HL 568 and Al-Saudi Banque v Clark Pixley [1990] 1 Ch. 313 have held that in general auditors only owe a ‘duty of care’ to the company (as a legal entity) rather than to any individual current/potential shareholder or creditor.

Yet the public has been lulled into believing that audits offer protection. For example, during the passage of the Companies Act 1929, audits were described as more than just for the “protection of shareholders and investors, wholly or even mainly” (Hansard, 21 February 1928, col. 1523). During the passage of the Companies Act 1948, audits were considered to be “in the interests and protection of the public  ....” (Parliamentary Debates, House of Lords, 18 February 1947, col. 745). During the passage of the Companies Act 1967, the then President of the Board of Trade said,  “It is right, both from the point of view of efficiency and of fair distribution of rewards, that full information should be available to shareholders, employees, creditors, potential investors, financial writers and the public as a whole” (Hansard, 14 February 1967, col. 360). Another supporter of the Bill added, “modern company laws should be concerned not just with the interests of the shareholders but with the contribution  of the company to the economic efficiency of the whole community” (col. 403). The Opposition benches supported the Bill and added that “We need a number of figures to be able to make that comparison, and it is this inquiry by those interested in the company, whether as an onlooker or as a shareholder in a number of companies, which is so important to improve the performance of companies in any particular industry” (Hansard, 14 February 1967, col. 444). The accountancy bodies and firms have cashed-in on these images.

For example, Coopers & Lybrand (now part of PriceWaterhouseCoopers) in its publications claims that audits are necessary

(a) to provide assurance to the owners of enterprises (e.g. the shareholders of a company) or to those ultimately responsible for their operation that the financial statements presented to them by those entrusted with the running of the enterprise may be relied upon to the extent indicated by the auditor in his report on the financial statements;

(b) to provide similar assurance to other users of the financial statements such as creditors, banks, employees, the tax authorities and potential  investors.

The ICAEW claims that “[Financial statements] are prepared to enable the company’s shareholders to gauge how well the directors have managed the company. In practice, financial statements are used by many people in the course of doing business with the company – for example, banks, trade creditors, customers, employees and the tax authorities. All these users are concerned that the financial information provided by the company should be reliable, and that they may look to the auditors’ opinion for confirmation that the financial statements give a true and fair view, although in practice they are likely to obtain other information before making any decisions. In law, though, they cannot usually rely on auditors’ report, which is addressed to shareholders”

The above statements suggest that auditors might owe a ‘duty of care’ to a wide variety of stakeholders. But the UK legal position, as summed by the Law Lords in the case of  Caparo Industries plc v Dickman & Others [1990] 1 All ER HL 568 is remarkably different. The Law Lords said,
 
“I see no grounds for believing that, in enacting the statutory provisions [requiring publication of audited company accounts] Parliament had in mind the provision of information for the assistance of purchasers of shares or debentures in the market, whether they be already the holders of shares or other securities or persons having no previous proprietary interest in the company ...... For my part, however, I can see nothing in the statutory duties of a company’s auditor to suggest that they were intended by Parliament to protect the interests of investors.
“I therefore conclude that the purpose of annual accounts, so far as members [shareholders] are concerned is to enable them to question the past management of the company, to exercise their voting rights, if so advised, and to influence future policy and management. Advice to individual shareholders in relation to present or future investment in the company is no part of the statutory purpose of the preparation and distribution of the accounts”.

“As a purchaser of additional shares in reliance on the auditor’s report, he [the shareholder] stands no different from any other investing member of the public to who the auditor owes no duty”.

The judgements have diluted the possibility of redress against negligent auditors. Despite enjoying statutory monopolies, auditors have no social responsibility. The Caparo judgement contradicts the public policy perspective suggested by Lord Denning in his dissenting judgement in Candler v Crane Christmas & Co [1951] 1 All ER 426.

“the law would fail to serve the best interests of the community if it should hold that accountants and auditors owe a duty to no one but their client. There is a great difference between the lawyer and the accountant. The lawyer is never called on to express his personal belief in the truth of his client’s case, whereas the accountant, who certifies the accounts of his client, is always called upon to express his personal opinion ….. and he is required to do this not so much for the satisfaction of his own client, but more for the guidance of shareholders, investors, revenue authorities and others, who may have to rely on the accounts in serious matters of business. In my opinion, accountants owe a duty of care not only to their clients, but also to all those whom they know will rely on their accounts in the transactions for which those accounts are prepared”.

In the UK, company directors can be held personally liable for publishing false and misleading accounts. Yet the same does not apply to auditors (Financial Times, 20 January 1991, p. 6). Auditors have been considered to be at fault in auditing financial statements (for example, see McNaughton (James) Paper Group Limited v Hicks Anderson & Co. [1991 1 All ER 134 and [1990] BCC 891; Berg Sons & Co. Limited & Others v Adams & Others [1992] BCC 661) but have escaped any damages on the ground that they did not owe a ‘duty of care’ to third parties.  Following the case of  Barings plc and another v Coopers & Lybrand [1997] BCLC 427, auditors of subsidiary companies could  owe a ‘duty of care’ to the parent company (as a legal person) but not to any human stakeholder. Even the ICAEW Chief Executive acknowledges that “individual shareholders would normally not be in a position to take action against negligent auditors” (letter to Austin Mitchell MP, dated 14 March 1994).

The UK laws act as a warning against anyone putting their savings and pensions in companies since there is no safeguard. Those making investment in the primary markets are given some protection by Section 150 of the Financial Services Act 1986. It states that “the person or persons responsible for listing particulars or supplementary listing particulars shall be liable to pay compensation to any person who has acquired any of the securities in question and suffered financial loss in respect of them as a result of any untrue or misleading statement in the particulars”. Thus individuals may have recourse against firms who report on prospectuses. Much of the information included in a prospectus is derived from annual audited accounts, albeit in a revised and modified form. But auditors who reported on the accounts upon which the information in a prospectus is based still do not owe a ‘duty of care’ to any individual stakeholder. In subsequent years, everyone knows that audited accounts are promoted as prospectuses and are used to persuade people to invest their savings in companies. Yet auditors do not owe a ‘duty of care’ to any individual stakeholder.

So the current institutional arrangements are loaded against the interests of ordinary stakeholders. They do not empower innocent stakeholders to seek redress from negligent auditors and do not provide adequate economic incentives to auditors to improve the quality of their audits. Auditors though are not complaining about their gravy train. the state has given them a monopoly of the external audit and they do not owe a 'duty of care' to any individual current or potential investor, creditor or any other stakeholder. In a society where buying a packet of sweets and crisps gives people consumer protection rights, auditors are leading a charmed life.