Auditing standards and litigation

Greetings. This is Prof. David Hay of the University of Auckland and Aalto University. I'm back in New Zealand now to give you this talk, which is Talk Number 9, and we're talking about auditing standards and litigation.

So what this deals with is the question of where do all the rules and regulations come from? What are the sources that tell auditors what to do? They basically come from legal precedents and underlying that the auditing standards. The legal precedents are court cases that have been decided over quite a long period of time. They decide on issues such as who the auditor is responsible to. And that's important because that means who can sue the auditor. Sometimes auditors get sued for vast amounts, amounts in the billions of dollars. So if investors have lost money, they might turn to the auditors. So that issue of who the auditor is legally responsible to could be very important. Sometimes the precedents and standards give the auditors some guidance on what they should do. More recently, as well as the legal precedents, we've had auditing standards, and they've been an important source of telling auditors what they should do. Even more recently than that, within the 21st century, there's been the growth of independent government-appointed bodies. Now these are independent regulatory organizations who inspect the auditor's work and make sure that it follows the standards. Now you notice that these kinds of requirements have developed over time. In fact, there's been a continuous cycle of more and more of these requirements being added. So the auditors become more and more regulated, and every time there's some kind of auditing scandal or some crisis, the regulators add some more regulations, add some more requirements. That's a trend that's probably likely to continue. Auditors are always going to have an ever-increasing extent of standards they have to follow. Let's talk about the legal precedents and