Question

Mega Shopping Centres has borrowed heavily in recent years. The pressures of rapid expansion have been felt within its finance department, and the chief financial officer (CFO) has begun to make mistakes. The CFO neglected to reclassify some of its debts from non-current liabilities to current liabilities following default on some terms of the contract with an international banking syndicate, and omitted contingent liabilities from the notes to the accounts. The billion dollar mistakes were not detected by either the directors or the auditors, and the financial report and audit report were published. Following discovery of the mistake, the shares in Mega Shopping Centres lost value rapidly and the company was placed into liquidation. Required Discuss the auditor’s liability for losses suffered by (i) Mega Shopping Centres investors, and (ii) other parties. (i) Mega Shopping Centres investors ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ (ii) other parties

Answer 1

To Investors of Mega Shopping Centres:

1. The auditor has to pay damages for all losses due to the result of directly negligence of the auditor.

2) The damages be called indirectly through the third party by the investors.

3) The auditors has to pay all the special damages as per any contract under prevalent circumstances.

4) All the million dollars losses committed by CFO can be claimed, due to non-detectation of mistake by auditors.

5) Reduction in the market price of the shares of the company can be claimed.

To the other parties:

1) Under the Consumer Protection Act, any party who is affected by the negligence of the auditors can claim compensation from the auditors.

2) The other parties has to prove that they have relied on the auditors advice and reports / Statements certified by them. Other parties has full right to claim damages.

3) Not only the cost loss but also the loss of prospective profit on the investment can be claimed.

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