Can auditors be blamed for the losses of the company?

Many people know that a company appoints an auditor to monitor and check the records and accounts and to certify that a company is clean. There are chances that mistakes will happen and this could send a company downwards or attract negative publicity. Amongst all this though, can the auditor be blamed for not checking the accounts properly? Can the auditor be accused of the company's losses?


Being an auditor is one of the highest paid and reputed professions one can get into. The amount of study that a person has to go through is massive, so it's known that those who enter into such a field are highly qualified and intelligent. Also becoming an auditor shows what he/she is getting into, (i.e.,bending of the rules here and there).

Who is an auditor?

An auditor is a person who checks the financial statements of a company or a firm and makes sure that everything is properly recorded according to statutory compliance. For this the auditor needs to ask the management for various documents, confirmations, returns, vouchers, etc. Based on all the information that an auditor gets, he will form an opinion.
The auditor's main job is to frame an opinion on the company. He needs to finally mention is his report whether or not the company deserves a clean report, an adverse report, a qualified report or a disclaimer.

Various Reports:

1.A clean report would indicate the company has been following all the rules and regulations according to the IT Act and the company act and has produced all necessary documents where ever required.

2.A qualified report would mean that there are a few doubts, or a few transactions that were recorded wrongly/omitted, or that sufficient evidence hadn't been produced, etc.
In order for a qualified report to be given, the amount of qualifications shouldn't be too material.

3.An adverse report would be one where there are a lot of discrepancies and that the whole firm/company isn't maintaining proper records of anything and there are many major faults.

4.A declaimer report would be one where the auditor would mention that due to the insufficient information provided by the company, the auditor couldn't form a proper opinion.

What a company should know before it hires an auditor.

When a company hires an auditor, that company should know what the limits of an audit are. An auditor is not responsible for the profits or losses of a company. An auditor works with whatever information is provided to him/her on the basis of his/her requirement.
An auditors' job is not to look for frauds in a company's balance sheet. There are chances that a misrepresentation or an omission could have been recorded and had not been realized by the auditor since it had been veiled, in that case, the auditors' judgment and qualification cannot be questioned in any way.
An auditor's job is to simply form an opinion of the company/firm and guide the company/firm into improving various fields for the next audit. An auditor's job is to not look for frauds in the financial statements. The auditor performs various tests and evaluative checks to make sure that the information given by the management is accurate and if during the course of audit, the auditor finds anything abnormal, then he may report and find out the reason for it. If he/she isn't satisfied then he may mention that in the auditor's report.

What the management should do.

It is the management's duty to make sure that a proper internal audit is done once; to make sure everything is in place and then appoint an external auditor for the actual verification. The management with its policies and rules is only responsible for its loss and the auditor cannot be blamed as such since an auditor is not the board of director of a company (and it is recommended that the auditor shouldn't have a special interest in the company he/she audits). The auditor is not at discretion to judge the rules and policies of the management, but only insists that whatever has been implemented has been done according to statutory regulations.
If the management window-dresses the accounts, or doesn't provide proper info to the auditor, then the auditor cannot do more than study what is given to him/her. In this context, if the company is questioned later on about a transaction which was concealed earlier, then the auditor is not at fault.

So before you appoint an auditor, make sure you know what the scope of auditing is, as it is not the responsibility of the auditor to make sure a company isn't going into losses. It is the management that needs to take care of all this

More articles: Auditor And Company Loss


Author: Ramachandran Pattabiraman26 Sep 2011 Member Level: Diamond   Points : 1

The judgement in the wellknown case of Audit subject,'Kingston Cotton Mills'case, an auditor is a watch dog but not a bloodhound - is to be cited here. An auditor is responsible for depicting the financial results of the company and is responsible for if there is any fraud etc., in the operation of the company. But it is not correct to blame him for the financial loss of the company.

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