Five Consolidated and Two Dissolved Local Banks: Are there Auditor Duty of Care Breaches?

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The voracious financial stress within Ghana’s banking industry can be likened to the likes of the 2008 global financial crunch and great depression experienced in 1929. But is ours really severe as those likes? It could be or not! With my observations and monitoring in the banking industry (financial sector as a whole), I will be narrowing my line of perspective on failures of good internal financial controls, corporate governance breaches (in accordance with OECD guidelines) and how the auditors of these banks could be or not be held liable. Some time ago, I made similar arguments which was published widely. In this episode too, I will be placing more emphasis on the former.

An auditor of a limited company has a responsibility, imposed upon him by statute (Companies code Act 719, Act1963 and International Standards on Auditing (ISA 200)), to form and express a professional opinion on the financial statements presented by the directors to the shareholders.

He must report to the shareholders. He must report the truth and fairness of such statements and the fact that they comply with the law. In so doing, the auditor owes a duty of care to the company imposed by appropriate statute. But such duty also arises under contract and may also arise under the common law (tort law).

The irregularities that characterized the sudden collapse of two of Ghana’s powerful banks, UT bank and Capital bank and Five been consolidated by the Bank of Ghana where a section of the public are holding the respective auditors of the banks to ransom must be looked at with critical analysis from legal perspective, professional outlook and empirical studies devoid of bias and negative misconceptions. And I happy the Institute of Chartered Accountants’ Ghana (ICAG) has developed some level of interest in the issues.

On August 14, 2017, the unexpected happened when the Bank of Ghana (BoG) announced the takeover of UT and Capital Bank. The bank of Ghana was left no choice but to revoke the respective license of UT Bank and Capital Bank which were “deeply insolvent”. The two banks liabilities overwhelmed their assets and the BoG deemed a Purchase and Assumption transaction as the least costly method of dealing with the collapses, according to citifmonline news.

As if that was not enough, here comes the biggest financial depression which has led to the consolidation of five (5) domestic banks due to their inability to meet new minimum capital requirements and other corporate governance breaches.

The collapsed banks were impotent and “unable to develop an acceptable plan”, according to the BoG which indicated in a statement that it made efforts to resuscitate UT Bank and Capital Bank recover through private alternatives but all to no avail. In the case of the five consolidated banks, their “offence” was that, they have failed to meet the new minimum capital requirements and other indicators according to BoG’s inside/outside investigations.

The fact is, matters of financial interest mostly inspires wholesale public outcry with divergent views. Whiles some individuals are attributing the presented insolvency within the 4th Republic to excessive political polarization, religious bigotry, and failed internal control systems as a result of the gross managerial and financial incompetencies on the part of the two bank’s respective Managing Directors, others also holds the view that, the negligence and lack of proper audit assurance is to blame on the takeover.

So, in this publication, I would focus and delve more into the auditor’s professional labilities as far as the auditor’s duty of care is concerned.

Let’s now shift the goal post from the BoG ‘life support’ which even was reported as exercise in futility to the Auditors of the victim banks in question and try to look closely into the nuances to see what actually went wrong in the eyes of professional analysis. In a similar way, let us also conduct a postmortem on the main issues where some section of the public strongly believed that there was an auditor breach of duty to care from those who think otherwise.

The Auditor’s duty of care:

The Auditor has a duty of care to the assurance client (company) automatically under the law. However, auditors may have professional liability in the tort of negligence. However, the standard of work of auditors is generally defined by competent legislation.

A number of judgements made in law cases show how the auditor’s duty of care has been gauged at various points in time because legislation often does state clearly the nature and manner in which the auditors should discharge their duty of care.

It is also not likely that this would be clearly spelt out in any contract setting out the terms of an engagement of an auditor’s appointment.

The fact is the annual audited financial statements of any institution has its users and has the effects to influence decisions of either existing or potential investors or shareholders. The public in general as an interested party to the audited financial statement has a strong stake.

But do auditors have any contractual relationship with a third party? Do a third party actually have a right to expect and hold auditors accountable to their independent opinion expressed on financial statements and even if they do, to what extent can they rely on the audited financial statement?

Does the auditor have any legally binding contract with a third party? What are the terms and conditions stipulated in the letter of engagement between the auditors and the company (UT bank and Capital Bank)?

Third Parties:

To third parties, the auditor only owes a duty of care to parties other than the audit client if one has been established. Third parties in this context means anyone other than the company (assurance/audit client) who wishes to make a claim for negligence on the part of the auditor’s finished works. It includes the general public, existing and potential investors etc. The key difference between third parties and the company is that third parties have no contract with the audit firm.

There is therefore no implied duty of care. The auditor’s duty of care is established, if the duty of care exist and can be proved, the duty is breached and can be proved and finally the breach of the duty of care accrued lose to the injured party which can also be proved with all legal means.

A major case and ruling on the Auditor’s duty of care:

Traditionally the courts have been averse to attributing a duty of care to third parties to the auditor. We can see this by looking at a very important case between ‘Caparo Industries pls v Dickman and Others 1990’.

“The facts as pleaded were that in 1984 Caparo Industries purchased 100,000 Fidelity Shares in the open market. On 12 June 1984, the date on which the financial statements (audited by Touche Ross) were published, they purchased a further 50,000 shares. Relying on information in the financial statements, further shares were acquired. On 4 September, Caparo made a bid for the remainder and by October had acquired control of Fidelity. Caparo alleged that the financial statements on which they had relied were misleading in that an apparent pre-tax profit of some £1.5m should in fact have been shown as a loss of over £400,000. The plaintiffs argued that Touche (audit firm) owed a duty of care to existing and potential investors.”

The conclusion of the House of Lords hearing of the case in February 1990 was that “the auditors of a public company’s financial statements owed no duty of care to members of the public at large who relied upon the financial statements in deciding to buy shares in the company. And as a purchaser of further shares, while relying upon the auditor’s report, a shareholder stood in the same position as any other investing member of the public to whom the owed no duty. The purpose of the audit was simply that of fulfilling the statutory requirements of the companies Act. There was nothing in the statutory duties of company auditors to suggest that they were intended to protect the interests of investors in the market. And in particular, there was no reason why any special relationship should be held to arise simply from the fact that the affairs of the company rendered it susceptible to a takeover bid”.

Professional view:

In its report, the Financial Aspects of Corporate Governance, the Cadbury Committee gave an opinion on the situation as reflected in the Caparo ruling. It felt that Caparo did not lessen auditor’s duty to use skill and acre because auditors are still fully liable (professional liability) in negligence to the companies they audit and their shareholders collectively.

Given the number of different users of financial statements, it was impossible for the House of Lords to have broadened the boundaries of the auditor’s legal duty of care. The decision in Caparo v Dickman considerably narrowed the auditor’s potential liability to third parties. The judgement appears to imply that members of various such user groups, which could include suppliers, potential investors or others, will not be able to sue the auditors for negligence by virtue of their placing reliance on audited annual financial statements, as their relationship with the auditor is insufficiently proximate.
But can the Auditor blow the whistle anyway?

Whiles the professional auditor is overwhelmingly guided to act in good faith and confidentiality with audit clients, there are as well some gaps and glowing concerns expressed by various user groups and wide public interest stakeholders in the audit assurance/company audited financial statements. And auditors may soon break that old veil and become liable to the public from December 15, 2017 according to the amended IAASB’s International Standards in Auditing (ISA) 250. “Among other enhancements, the changes to ISA 250 prompt the auditor to think about whether to report identified or suspected non-compliance with laws and regulations (NOCLAR) to an appropriate authority outside the entity, taking into consideration the provisions of laws, regulations, or relevant ethical requirements in their jurisdictions, and to consider the impact of NOCLAR on the audit”, explained James Gunn. Managing Director, Professional standards.


Auditors just like lawyers are guided by rules, ethical codes of conduct and jurisdictional laws and regulations. With all my other astute international tort cases reviews in relation to the auditor-client contractual engagement currently, there was not a ruling and or law/regulation which puts the auditor directly accountable to a third party unless proven beyond all reasonableness. Meanwhile, they (auditors) have been put in trust between their clients and company as a whole to conduct their audits in an honest, fair, true and independent manner using safeguards against all forms of threats. They are put in a pontifical position to duty to care by using reasonable skill in their professional judgements in discharging their duties of service to clients in accordance with adequate standards and codes of conducts (ISA and relevant laws governing their jurisdiction).

A credible remedy to these emerging issues will be the Institute of Chartered Accountants, Ghana (the professional accountancy regulator in Ghana) instituting a full independent professional scale investigation into the matter. This way, the findings of the committee could be used to clear the doubts and recommend prudent measures that auditors can use in their future engagements in these fast evolving industry!

By: Eli K. Avickson


NB: The views and or issues raised in this article do not represent those of any organization(s) but the independent views as expressed by the writer. The writer also referenced from , )

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