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How is law of negligence Applicable to a company auditor ? What are its impacts?
Law of negligence Applicable to a company auditor
Negligence, in law, is a breach of a legal duty. This law has its roots primarily from the Tortious liability. This becomes evident whenever there is a breach of a duty. Such parameters are set up by the law towards persons with an action of breach leading to un-liquidated damages.
Inherent Province of the Law of Tort (1931) (Richard Smellie 2002)
“Tort” originated from the Medieval Latin word “tortum” meaning, something twisted. It has high implications for a civil wrong leading to injury and arising mainly because of failure to act. The law ensures that action for damages is brought, and is independent of any contract. Simply negligence is a careless act of failure to impart, due care and required attention or concern. Thus negligence has fixed legal duties imposed by law. It is based out of conduct, not agreement (contract) or the protection of an interest (nuisance or defamation).
As per the cases, there can be an overlap of negligence with other torts, like negligence and contract. Often, agreements or interest is damaged by conduct like interference with enjoyment of land leads to liability in tort of nuisance (protection of interest) and the tort of negligence. Thus building works that violate contractual obligations may be because of the result of negligent conduct.
Often in cases where land subsides, renting damage to property; often there is no contract fixing duties for the two parties, i.e. person who suffers the loss due to damage and the responsible person for damage. Thus tort of negligence is applicable to establish liability and recover damages incurred.
Important Ingredients of a negligence claim
As per the case of Grant v Australian Knitting Mills Limited  AC 85 (Commercial Law- PRIVY COUNCIL 2003) the tort of negligence is committed when damage is sustained. The scope of negligence law widens as it not only acknowledge carelessness, but also the implication of inflicting damage carelessly where law recognizes a duty imparted to be careful. Thus Duty is the first and foremost ingredient of a negligence claim:
English law necessitates the fact that duty has to be established: for example the mere fact that a person is injured by the act of another person gives no cause of action; so long the other party is exercising a legal right.
The three essentials ingredients establishing negligence are:
i. Careless conduct which breaches the duty.
ii. Connection between conduct and damage incurred.
iii. Argument supporting the fact that the conduct was foreseeable, i.e. it could inflict damage to the harmed person.
Thereafter, case is established and consideration of defendant’s responsibility (e.g. involvement of others) and monetary estimation of damage is done.
More substantial clauses are added along with foreseeability of damage. For cases of duty of care there should be connection between the party owing the duty and the corresponding party to whom it is owed. In the courts of law to consider a particular case, relationships should be characterized by law as ‘proximity’ or ‘neighborhood’ so that court considers it as fair, justice & Reasonable for law to impose a duty on one party for the benefit of the other.
Types of loss – Physical damage and Economic loss
The law of negligence mainly recognizes two different categories of losses which are relevant for subsidence claims. These are damages caused to persons or property and secondly financial damages.
Two primary cases that are evident are Donoghue v Stevenson  AC 562 and Hedley Byrne & Co Limited v Heller Partners Limited  AC 456.
Donoghue v Stevenson (SCQ Library-Donoghue V Stevenson 2010)
Mrs. Donoghue and her friend went to Minchella’s café, Paisley and ordered a “ginger beer float”. On pouring the ginger beer into her tumbler, remains of a snail floated. Mrs. Donoghue filed a claim stating that Stevenson (vendor who bottled the ginger beer and supplied it to café), was bound by a legal duty of care, for keeping snails out and inspect the filled bottles. This breach of this duty has inflicted illness. House of Lords agreed upon duty of care exists among”neighbors”. Lord Atkin from the house of Lords said:
The rule to love your neighbors become law, and it restrains a person from injuring neighbors; Neighbor can be any person directly affected by another’s actions.
This case embarked the beginning of proximity and foreseeability tests for negligence. Likewise, cases with subsidence claims are dealt with under similar purview. If a big tree growing next to a building causes subsidence effect to the building, then owner of the tree is liable for negligence and damage to the building’s foundations. Physical damage is foreseeable and directly result of the negligence conduct.
Often known as “Special Relationship” principal this particular case sets up the rule for claiming economic loss, physical damages are either absent or minimal. Proximity is the special relationship, and misrepresentation is a mis-statement. It highlights the following:
The proximity includes intelligent misrepresentation/ mis-statement, or a conduct amounting to a high degree of proximity.
i. Reliance upon the party with whom it was made.
ii. Assumption inferred upon the responsibility of the party making the representation.
iii. Foreseeability of financial damage because of inaccurate representations.
SOX and Auditors’ Independence
Above two cases are evident and crucial in developing a strong embodiment of guiding principles. The U.S. in the year 2002 enacted to come out with the Surbanes Oxley Act 2002 (Accounting Articles- GAAP 2009) after incurring the great collapse of Enron due to fraudulent activities like insider trading and lack of auditor’s independence. Unfortunately, auditors made large sums of money by not alerting the investors’ forehand. Enron conspired with many other companies along with auditors, executives, investment bankers and analyst, to get away in silence that sacrificed objectivity and careers for money and short-term gain. Lack of objectivity contributed to Enron’s collapse and trust of stake holders as investors’ counts on auditors for protecting their interests, by letting them know in advance about market frauds.
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