Overview
When choosing a legal service provider, one may question the regime of liability of the various professionals available. These regimes vary in Europe with two different models: the harmonized regime illustrated by that of statutory auditors and the non-harmonized regime illustrated by the rules applicable to legal counsels.
European Directive 2006/43/EC has set a basic legal framework harmonizing the status of statutory auditors in Europe. Pursuant to the Directive's provisions, the European Commission issued a consultation paper to assess the appropriateness of a European harmonized regime. It proposes the establishment of a liability cap for statutory auditors in Europe. Even though the basic regime is unified, the liability part is left to the discretion of each of the Member States.
We will first see that statutory auditors' liability can take the form of a proportionate liability regime (Spain), a cap on liabilities (Germany), or even an unlimited liability regime (France). It shall be noted that a new directive amending the 2006 text has been adopted but it does not provide for a unified liability regime for auditors.
Amongst Member States, the qualification of "counsel" can refer to a large variety of professions, some of them may not even have an equivalent in other jurisdictions (e.g juriste d'entreprise in France). In the absence of harmonization, we will then address the liability of tax and legal counsels (in France and England).
Liability of statutory auditors in Europe
a) France
Regulatory framework
Regime of liability
The civil liability rules are provided by Articles L822-17 and L822-18 of the French Commercial Code. This civil liability raised many doctrinal debates on the existence of a contractual liability. The majority agreed on the non-existence of such liability. First, Article L822-17 directly refers to the notions of "fault" and "negligence" characteristic of the French tortuous liability. Some important decisions, regarding CAC, directly referred to Article 1382 of the French Civil Code that sets the tortuous liability regime. Therefore, aggrieved third-parties will have to demonstrate: the CAC's fault, the damage and the causal link. It is worth noting that he is only bound by an obligation of means and not of result, except in particular cases.
In addition to civil liability, the CAC is subject to a criminal liability and may be convicted on the basis of Articles L820-5 to L820-7 of the French Commercial Code.
The CAC is finally submitted to a professional liability. Being a licensed professional, he is submitted to the rules of his professional body (National Company for Commissaires aux Comptes). This organization therefore enjoys disciplinary prerogatives over its members. At the top of this disciplinary structure, the Haut Conseil du Commissariat aux Comptes, amongst its missions, ensures the respect of both the independence and the deontology. Moreover, the CAC shall perform his work according to the rules set in the deontology Code for French CAC.
As a consequence, France tends to be considered the perfect example for unlimited liability towards statutory auditors. Their liability can be engaged through civil, criminal and professional provisions, leaving almost no space to a limitation of their responsibility.
b) England
Regulatory framework
In England, the legally defined term of a statutory auditor is registered auditor referring to an approved independent specialist, essential element of the system of corporate governance. Chapter 1 of Part 16 the Companies Act 2006 relates to audits of large and medium-sized limited liability companies that must be performed by a statutory auditor. Chapter 3 of the Act specifies the legally defined role of the auditor, carrying out audit of annual accounts for the company and then ascertaining the validity and legality of its financial records. It shall be noted that some professional bodies (ICAEW) issue guidelines, particularly for auditors.
Regime of liability
The provisions of the 2006 Companies Act specifically address auditor's liability to clients, but not to third parties. Thus, the basic contractual duty of an auditor is to perform his function using reasonable care and skill. When failing to do so, the company (the client) can bring an action for damages. Third parties outside the contractual relationship may also seek damages in tort for an auditor's negligence. The limited circumstances were mainly determined in the Caparo case where the scope of liability to third party for negligent misstatement has been confirmed but narrowed.
Initially in England, nothing was established for auditors to limit their liability. However, a fundamental review of the UK company law framework occurred with the enactment of the Companies Act 2006, especially regarding liability limitation agreements. Since then, Chapter 6 allows auditors to limit their liability by contract with their clients, with respect to shareholder approval and the amount being fair and reasonable.
c) Spain
Regulatory framework
Statutory auditors in Spain are referred to as Auditor de cuentas. The greatest change to the audit profession in Spain came in 1988 with the promulgation of the Law of Audit (Law 19/1988 of July 12). The Law of Audit 1988 made it mandatory for all large and medium sized companies to audit their financial statements.
The Law of 12/2010 of 30 June approving the Law of 19/1988 on Auditing introduces a proportionate liability regime. The Law of Audit 1988 has been abrogated and since July 3 2011 replaced by the Consolidated Text of the law of Auditing 2011 (RLD 1/2011).
The role of the statutory auditor is defined in Article 1.1 of the RLD 1/2011 whereby the auditor reviews the accounts of the company giving a fair view of the company's business, financial position and results. The auditor must also ensure that the management report agrees with the accounts reviewed. Thus, the financial reporting duty of the auditor can only serve its purpose if the information provided can be relied upon for its accuracy and reliability by the stakeholders and third parties.
Regime of liability
Statutory auditors in Spain have long been submitted to an unlimited liability regime. However, to be in line with European standards, based on the European Directive 2006/43/EC, Spanish authorities introduced a limitation of responsibility for statutory auditors. Therefore, Article 11.2 of the Law 12/2010 of 30 June introduced a proportionate liability regime.
Statutory auditors are now only liable for direct damages and losses of profits caused by their professional activity to the audited company or any third party provided by Article 22.2 RLD 1/2011. The third party must have been led by the information provided in the audit report, and based on this information it incurred financial losses. Since the auditor signs the audit report, he may be held responsible for such losses or damages caused upon reliance on the audit report. The auditor would only be responsible for the amount of damage equal to its share of liability in the event triggering the claim.
d) Germany
Regulatory framework
There are two types of statutory auditors in Germany namely Wirtschaftsprüfer (WP) and vereidigter Buchprüfer (vBP). VBP permitted authority is limited to medium-sized companies that are not required to have their financial statements audited by any other regulations.
Their missions are the same as the traditional ones in other European countries. The regulatory framework is constituted of the German Civil Code, the German Commercial Code and the Wirtschaftsprüferordnung (WPO) which has been intended as a legal act regulating both the auditing activity and auditors performing such audits.
Regime of liability
The civil liability for statutory auditors in Germany is based on tort law and on some special provisions providing for a contractual liability of statutory auditors in the situation of a breach of their duties.
For example, the liability for WP's and vBP's negligent breach of duty in Germany is limited by a monetary cap set in §323 Section 2 of the German Commercial Code. It is limited to 1 million Euros, except for companies whose shares are admitted to trading on regulated markets where the cap limit is of 4 million Euros.
This liability does not exist for non-mandatory audit of financial statements. However, it shall be applied in the situation where, even though §323 shall not directly apply, there is a reference made to this special provision in other regulations. In addition, a monetary cap will not apply in cases where the auditor was dishonest and deliberately breached his duty.
In the case where this statutory limit shall not apply, liability is unlimited. Nonetheless, like in the UK, there is a possibility for statutory auditors to contractually limit their liability. This possibility is provided by Article 54(a) of the WPO and can occur either individually or through standard terms and conditions.
Liability of tax and legal counsels in England and in France
a) England
Civil liability of independent tax and legal counsels
Both tax and legal counsels owe a duty of care to their clients. The client may be entitled to reparation if he has incurred losses relying on the work of the tax or legal counsel.
The applicable standard for the duty of care expected from the tax or the legal counsel in the performance of his duties is one which is expected from professionals. The standard is thus higher than that expected from a layman, but should be one of a "reasonably competent" solicitor or tax counsel.
The standard of care for professional persons in general was defined by Lord Diplock of the English House of Lords in 1978 in Saif Ali v. Sidney Mitchell & Co., as follows:
"Those who hold themselves out as qualified to practice other professions, [...] are nevertheless liable for damage caused by their advice, acts or omissions in the course of their professional work which no member of the profession who was reasonably well-informed and competent would have given or done or omitted to do."
In order to limit exposure, independent solicitors acting as legal counsels must be covered by insurance in accordance with the SRA Indemnity Insurance Rules.
Civil liability of salaried tax and legal counsels
Liability of salaried tax and legal counsels is covered by their employment contract and principles of vicarious liability.
In other words, if the employer is liable to a third party as a result of the employees' negligence, the employer is obliged to discharge that liability but is entitled to be indemnified by the employee for whatever amount the employer has paid. As such, it is for the employer to decide whether or not it is necessary to obtain insurance. There is an implied assumption that the employee will conduct his duties with the relevant care and skills, as any other employee.
The duties and responsibilities of the salaried legal counsels were discussed by Lord Denning in Alfred Crompton Amusement Machines Ltd v. Customs and Excise Commissioners. He indicated that the legal counsel who is an employee is subject to the same duties and responsibilities as the independent solicitor. Moreover, he justified such a decision with the fact that although the salaried counsel is employed and working for one corporation only, the nature of his work is the same as that of an independent solicitor. As such, the salaried counsel must be subject to the same standards as the independent solicitor, except if they have contractually agreed not to be subject to such a standard.
b) France
Civil liability of independent tax and legal counsels
Tax and legal counsels are known in France as "avocats", and are subject to the rules of their professional body. As such, independent legal counsels in France are covered for their liability by their local bar association.
Civil liability of salaried tax and legal counsels
Tax counsels are covered by their employment contract, while the situation is slightly different for salaried legal counsels in France. A salaried legal counsel who is based in-house is known as a "juriste d'entreprise" in France.
Contrary to common law which provides that salaried counsels enjoy the same status as independent counsels, French law still considers these two professions as separate. As such, salaried legal counsels in France, although they perform an almost similar function of an independent legal counsel, are not subject to the rules of conduct of the French bar. They are for example, not covered by legal privilege. The legal privilege principles are not extended to communications between salaried in-house legal counsel and directors of a company that aim at obtaining legal opinions on subjects related to their work.
The acts of the salaried in-house legal counsel are covered by an insurance subscribed by the employer. Salaried in-house legal counsels providing legal opinions to their own company may put the company at risk if the legal opinion is incorrect.
CONCLUSION
This QuickCounsel outlines the variety of regimes of liability applicable to statutory auditors, tax and legal counsels. As such, France comes out as a jurisdiction of choice with regards to statutory auditors whose liability is unlimited. However, the employee status of the salaried in-house legal counsel is not a favorable situation for his employer.
Nevertheless, this variety of regime diminishes. Thus, the draft law, presented on 15th October 2014 by the French minister of economy and finance, aims to harmonize the imbalance between salaried in-house legal counsels and independent legal practitioners. The salaried in-house legal counsel lawyers, while still being in an employment relationship, will become members of the bar and thus subject to disciplinary sanctions. In addition, they will benefit from professional secrecy, limited to civil procedures. There is still a long way to full harmonization.