just reading about a legal case; Caparo Industries plc v. Dickman the defendent was an auditor who’s audited accounts were used to make decisions by the claimants who were investors buying shares in a company they had audited. The audited accounts turned out not to be an accurate reflection of the companys financial position, however claims made against the auditor were turned down by the house of lords due to a proximity rule.
This had me wondering if the house of lords wont hold auditors accountable then who does, I'm guessing the LSE has mechanisms to insure audited accounts are acurate, but how robust are they and if it goes wrong where do we go for compensation.
This had me wondering if the house of lords wont hold auditors accountable then who does, I'm guessing the LSE has mechanism to insure audited accounts are acurate but how robust are they and if it goes wrong where do we go for compensation.
There is no compensation scheme. If you lose money as a result of misstated accounts its gone for good. Caveat emptor and all that.
The case law is complicated. Caparo v Dickman goes back to 1990. Broadly speaking if there's no direct relationship between the auditor and the third-party then the auditor can't be found liable because they can't reasonably be expected to know what an unknown third-party intends to do with the information.
The other key case was RBS v Bannerman in 2002, when RBS were successful in suing an auditor. The difference was that Bannerman was aware that RBS intended to lend money on the basis of their accounts and so were held to have a duty of care to them.
To all intents and purposes shareholders have no recourse if a company is defrauded or they buy shares on the basis of misstated accounts. Potentially the company, or its administrators do - if the auditors are acting on behalf of the company then they have a duty of care and can be sued. However, particularly when a company goes bust that's of limited benefit as shareholders are at the back of the queue for whatever assets are left.
Of course, the auditors will be held accountable for failings. They can be fined and individuals banned. But that doesn't bring back our lost value.
Personally I hope this never changes. The fact that we can lose money due to fraud or our own ineptitude is the reason why shares provide an outsized return. It also means, ultimately, that people who put the effort into understanding companies and accounts are likely to outperform those who don't.
Most dubious accounting is detectable although as we've seen with Patisserie Holdings (LON:CAKE) this year there are exceptions. More recently Yu (LON:YU.) was an obvious problem - companies that accrue lots of future earnings have long been known to underperform.
Us shareholders, we're the last bastion of the free market. No health and safety for us, invest and be damned :)
timarr
