Auditors' Liability for BCCI

Publication Date01 Jan 1994
AuthorKenneth Mullan
SubjectAccounting & finance
Auditors' Liability for BCCI
Kenneth Mullan
Kenneth Mullan
is a Lecturer in Law at the University of
In an earlier contribution to this
author sought to analyse the legal implica-
tions of the recent decision by the liquida-
tors of the Bank of Commerce and Credit
International (BCCI), Touche Ross, to issue
writs against the Bank of England claiming
damages on behalf of a small, representa-
tive number of depositors. This paper will
seek to complement that analysis by
examining the legal implications of a paral-
lel decision by the liquidators of BCCI to
issue writs against the auditors of
Price Waterhouse and Ernst & Young, the
joint auditors of BCCI until 1987. These
writs allege that the audited accounts would
have indicated that BCCI was in trouble and
that, as a result, a duty of care was owed to
existing depositors and to potential inves-
An examination of the case law on the
range of duties owed by auditors in carrying
out their statutory functions will conclude
that the potential actions against Price
Waterhouse and Ernst & Young are unlikely
to succeed.
The principal question which would
need to be answered in an action by the
depositors and shareholders against Price
Waterhouse and Ernst & Young is to
whom does an auditor owe a duty of
care when he or she carries out his or
her statutory function of auditing a
company's accounts? In examining the
liability of auditors in carrying out their
statutory functions it is important to
explore this liability through the rela-
tionships which auditors have internally
with the company and externally with
third parties. The importance of
distinction lies in the fact that the judi-
ciary seem to take a different approach
depending on the nature of the rela-
tionship between the parries. It also has
implications for whether an action may
be brought against an auditor under the
legislation, in contract or in tort.
The statutory duty of an auditor is to
report to the members whether the
accounts give a true and fair view and
have been properly prepared in accord-
ance with the legislation. To fulfil the
statutory duty, the auditor must carry
out such investigations as are necessary
to form an opinion on whether proper
accounting records have been kept,
proper returns have been received, the
accounts are in agreement with the
records and the information given in the
directors' report is consistent with the
accounts. Auditors have wide powers to

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