Court examines possible Professional Negligence of Auditors in recent decision

A recent court ruling in Cyprus, in which our firm represented the auditors, has dismissed a case alleging auditor negligence, reaffirming the professional standards required for liability in such matters. The plaintiffs sought damages from the defendant auditors, arguing that their failure to act diligently resulted in financial losses. However, the court found no basis for negligence and ruled in favour of the auditors.

Case background

The case revolved around the plaintiffs' claims that the auditors had failed in their professional duties by neglecting to ensure proper tax declarations and financial reporting. The plaintiffs alleged that the auditors' inaction led to the inability to reclaim an overpaid tax from the Cyprus Tax Authority.

Specifically, the plaintiffs accused the auditors of:

• Failing to submit accurate financial statements.
• Omitting necessary steps to claim a tax refund within the prescribed legal timeframe.
• Conducting their work in a manner that did not align with professional auditing standards.

The auditors, on the other hand, contended that their role was limited to providing services based on the engagement letter as well as documentation and information provided by the company's management. They argued that the ultimate responsibility for tax compliance and financial reporting rested with the company’s directors and not with them.

Key findings of the Court

The court ruled in favour of the auditors, dismissing the lawsuit on the following grounds:

1. Lack of Direct Responsibility: The court determined that the auditors were not directly responsible for the financial losses claimed by the plaintiffs. Their role was advisory, and the obligation to file tax returns or reclaim overpaid taxes was the responsibility of the company’s management.
2. Insufficient Evidence of Negligence: The plaintiffs failed to provide sufficient evidence demonstrating that the auditors had acted negligently. The court noted that no clear breach of professional auditing standards was proven. All? witnesses of the claimants were proved to unreliable, except an accountant who argued that the tax overpayment is an issue that concerns mainly the company’s directors and not the auditors, and that the audit carried out by the auditors depends only on the information and documents that the company provides them with. Furthermore, he argued that during the years when the plaintiffs and the defendants had an agreement, the auditors charged only for services they have indeed carried out and not anything more, even though the claimants argued the opposite.?
3. Expiration of Legal Deadlines: The claim for a tax refund had expired due to the statutory limitation period, which was not the responsibility of the auditors but rather the company’s directors and the only person who was managing its affairs by power of attorney.
4. Reliance on Client Information: The court emphasized that auditors rely on the accuracy of financial information provided by their clients. If the company failed to maintain proper records, and failed to provide the auditors with the necessary documents and information that the auditors have asked for, then the auditors could not be held accountable for the resulting consequences.

Implications of the ruling

This decision underscores the importance of clearly defined roles in financial auditing and corporate governance. It reinforces the principle that auditors are not liable for company mismanagement unless clear evidence of professional misconduct is demonstrated.

Furthermore, the ruling highlights the necessity for companies to ensure proper internal controls and financial oversight, to adhere to the terms of the engagement letter with their auditors and to provide them with the necessary documents and information that they require, in order avoid potential tax pitfalls.

This judgement sets a significant precedent in Cyprus regarding professional liability for auditors and is likely to influence future legal disputes in the financial services sector.

By Christos Raounas

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