A recent ruling from the Austrian Supreme Court concerning the liability of auditors in damages for providing an unqualified opinion on an insolvent debtor.
Pursuant to sec. 275 para 2 of the Austrian Commercial Code auditors are liable for damages caused by negligent (or intentional) violation of their duty to perform audits impartially and diligently. The liability is capped at EUR 2 mill. for audit of smaller companies.
Facts of the Case
The respondent provided an unqualified auditor’s opinion while the debtor was already insolvent and would have been obliged to file for insolvency.
The auditor’s opinion was based on documents provided by the managing director. Those documents did not accurately reflect the economic state of the company and (e.g.) omitted bank liabilities in the amount of EUR 4.7 mill.
Between May 2008 (date of the auditor’s opinion) and March 2010 (opening of the insolvency proceedings) the debtor’s liabilities increased by about EUR 5.4 mill, while there was no tangible growth in the value of assets.
The Austrian Supreme Court ruled (8 Ob76/15g) that the auditor was fully liable for all damages caused by (falsely) providing the unqualified auditor’s opinion. Following the calculations made by the insolvency administrator the court ruled that damages were measurable by the difference between assets and liabilities from the time when the auditor provided the opinion up to the point where the debtor actually filed for insolvency. The fact that the opinion was based on information provided by the managing director did not exonerate the auditor – although the auditor was entitled to pursue remedies against the managing director.
The present decision further reinforces the principle that auditors cannot depend on unverified information provided by a company being audited.
When advising auditors on potential liabilities, it is important to stress that the auditor should at least check the most crucial information provided by an audited company. Failing to do so might – as this decision shows – lead to substantial liabilities for the auditor.
From the insolvency administrator’s perspective, this provides another way of increasing the insolvent’s estate, similar to pursuing remedies against the managing director for damages caused by failure to file for insolvency in due time. The way the damages are calculated is essentially the same.