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Liabilities of an Auditor

The liabilities of an auditor can be summed under the following heads:

1. Civil liabilities

2. Criminal Liabilities


1. Civil Liabilities:


(I) Liability for Negligence:


The liability of an auditor arises where it is proved that his client has suffered a loss due to his professional negligence. The auditor may be held personally liable if it is proved, that had he exercised reasonable care and skill, he must have discovered the discrepancy. In a case, it was held that if an auditor fails to show as much skill and diligence as is expected of a man of ordinary prudence, he must suffer the consequences.


(ii) Liability for misfeasance:


According to section (340), the court may assess damages against the delinquent director and other officers of the company, including an auditor for misfeasance or breach of trust. In case of an auditor who also comes within the definition of officer in section 2 for purpose of the section, if he is guilty of neglect of duty or misfeasance, so as to cause loss of the company in any way, proceedings may be taken under this section against him either independently or other officers or jointly with them. This section provides a simple way for the company to recover damages where an auditor or any other officer of the company is guilty of misfeasance. The time limit for bringing an action is 5 years.


2. Criminal Liabilities:


i) Misstatement in prospectus section 34:


Where an auditor makes a false statement with material particulars in returns, reports, prospectus or other statements knowingly it to be false or omits any material facts knowing them to be false, he shall be punishable with imprisonment for a minimum term of 6 months extendable to 10 years.


ii) Non-compliance by auditor with section 143 and 145:


If the auditor does not comply with section 143 and 145 regarding making his report or signing or authentication of any document and makes willful neglect on his part he shall be punishable with imprisonment up to 1 year and with fine not less than twenty thousand extendable to five lakhs.

In case of an auditor knowingly or willfully with the intention to deceive the company or

shareholders or creditors or tax authorities, he shall be punishable with imprisonment up to 1 year and fine not less than 1 lakh extendable up to twenty-five lakhs.


iii) Failure to assist in the investigation section 217 (6):


Where the central Government appoints an inspector to investigate the affairs of the company, it is the duty of the auditor to preserve and produce to the inspector all books and papers relating to the company. If an auditor fails to assist the inspector in the investigation he shall be punishable with imprisonment up to 1 year and with fine, not less than twenty-five thousand extendable to 1 lakh


iv) Penalty for falsification of books section 336:


Any officer including the auditor of a company that is being wound up, with an intention to defraud or deceive any person, destroys, mutilates, alters, falsifies any books, papers or securities. He shall be punishable with imprisonment for a term not less than 3 years extendable to 5 years and with a fine, not less than 1 lakh extendable to three lakhs.


V) Penalty for a deliberate act of commission or omission section 448:


If any officer including the auditor of the company deliberately make a statement in any return, report,

certificate, balance sheet, prospectus etc. which false or which contains omission of material facts shall be punishable with imprisonment for a term not less than 6 months extendable to 10 years and fine not less than the amount involved in fraud extendable to 3 times of such amount.







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