Question

The length of each answer should not exceed 250 words. (15 marks)

Alex had bought X Company shares and invested $1 million in the company. Alex had decided to invest money in X Company based on Auditor's report. Mueller is the auditor of the X Company and had prepared Company's yearly financial statement. Mueller had written an annual profit of $12 million in the financial statement. After a few months of investment by Alex, the securities commission suspended trading, and when trading resumed, the price of each share went down substantially. Then Alex learned that the auditor's report was based on fraudulent information supplied by the management of X Company. The X Company had lost $20 million in that year instead of having a profit of $12 million. Alex came to know that Mueller was negligent for not detecting the accuracy. Alex sued Mueller (auditor) for negligence and claimed damage. Did Mueller owe a duty to Alex to be careful? Answer in detail

Answer 1

Mueller, the auditor, had a duty to Alex to perform an audit with due diligence. If negligent, Mueller may be liable for Alex's damages. Courts will consider the relationship, reliance, and foreseeability of harm to establish duty and liability.

Step-by-step explanation:

Yes, Mueller, being an auditor, owed a duty of care to Alex to conduct the audit with due diligence and to detect any inaccuracies or fraudulent information in the financial statements of X Company. Auditors have a professional and legal obligation to exercise a reasonable standard of care while performing their work. If Mueller was negligent in his auditing duties and failed to uncover the financial misstatements that a reasonably competent auditor would have found, and Alex relied on this fraudulent report to make his investment decision, Mueller may be held liable for the resulting damages Alex suffered due to the share price drop upon the revelation of the true financial state of the company.

In cases like this, the courts would consider whether the auditor had a direct relationship with the shareholder (investor), whether the auditor was aware that the shareholder would rely on the report, and if the extent of the potential harm was foreseeable. If these conditions are met, it is likely that the auditor had a duty to be careful and may be liable for damages caused by their negligence.

Answer 2

Auditor Mueller had a duty of care to Alex, and negligence in this duty led to Alex's financial losses when he relied on the faulty audit report to invest in X Company. This negligent act may hold Mueller liable for damages.

Step-by-step explanation:

Yes, auditor Mueller owed a duty of care to Alex.

In cases of financial statements audit, auditors must adhere to standards of due diligence and care to not only their client but, under certain circumstances, also to third parties who may rely on the auditor's report for making financial decisions.

An auditor has the responsibility to conduct the audit with professional skepticism, and they must take reasonable steps to detect inaccuracies or fraud.

In this case, Mueller's negligent behavior led to Alex making an investment decision based on an inaccurate report. The law recognizes that auditors could be liable for negligence if they fail to exercise the care that a reasonably prudent auditor would use under similar circumstances, and there is a proximate cause relationship between the auditor's negligence and the plaintiff's (Alex's) losses.

Alex's action against Mueller would center on proving that Mueller breached this duty of care, resulting in Alex suffering damages when the truth about the Company's finances was revealed.