Question

With regards to Auditor Legal Obligations, statutory liabilities and civil liabilities are established through security acts and common law decisions. These are sometimes minimum requirements regarding ethical conduct. When auditor responsibilities are not clear in an ethical dilemma, where should auditors turn for guidance and why? ( Hint: Where do we typically go for guidance in many of our cases in this class?)

Answer 1

The Difference between Common Law & Security Acts are:

1. Common law liability comes from legal opinions issued by judges in deciding cases whereas Statutory liability reflects legislation passed at the state or federal level.
2. In Common law Liability, opinions become legal precedent and guide other judges in deciding on similar cases in the future. Common law cases are civil suits whereas in Statutory Liability, the legislation establishes certain courses of conduct. Statutory law can either result in civil liability or criminal liability.

   A good example of statutory law is the SEC securities acts that establish liabilities for auditors in conducting an audit in accordance with GAAS and responsibilities with respect to material misstatements in the financial statements. Auditors have liabilities for ordinary negligence; gross negligence (constructive fraud); and fraud.

Auditor legal obligations are a minimum requirement. The securities acts & Common Law establish liabilities as per their acts. The law establishes minimum requirements for ethical conduct of Auditor. The problem is when auditor responsibilities are not clear it is the ethical standards of the profession in the form of the Principles of Professional Conduct embodied in the AICPA Code that should guide auditors. Auditor ethical responsibilities will often go beyond what is required by law because the law cannot cover every situation an auditor might encounter. When the facts are unclear and the legal issues uncertain, an ethical person should decide what do on the basis of well-established standards of ethical behavior. In addition to the AICPA ethical standards, discussed in chapter that ethical standards require the auditor to reason through ethical conflicts weighing the effects on stakeholders and placing the public interests above all others. An ethical auditor will often do less than is permitted by the law and more than is required.