Auditors’ liability to third parties ‐ the door remains open

This article examines the area of auditors’ liability to third parties. It commences by reviewing landmark historical cases, from Ultramares (USA 1931) to the most recent watershed case Caparo (UK 1990). Three subsequent Australian cases in the 1990s which yielded interesting judgements are then summarised. First in Re Lowe Lippmann Figdor & Franck (1992) it was held auditors did not owe a duty of care to a third party creditor, who had lent money to a client. In contrast, the Columbia Coffee (1993) case found an audit firm liable to a third party as the audit firm’s own audit manual included a statement acknowledging third party interest on occasion. In Esanda Finance v Peat Marwick Hungerfords (1997) the High Court of Australia ruled auditors did not owe a duty of care to a third party but demonstrated such a liability might exist if for example the audit firm knew a particular third party was to rely on their work in relation to a specific transaction. The article concludes by summarising factors necessary for a successful third party claim, based on the cases already discussed.