Auditor obligations in an evolving legal landscape

Abstract

Purpose

The purpose of this paper is to look at auditor obligations to their clients and potentially to third parties such as investors, with a focus on the quality of financial disclosure in an evolving legal framework.

Design/methodology/approach

The article outlines and compares established and emerging trends relative to information disclosure and contractual performance in parallel contexts where information asymmetry exists. In particular, this article considers the disclosure regime that has evolved in the insurance industry to address the substantial imbalance in the level of knowledge possessed by the insured in comparison to the prospective insurer. Abductive reasoning is used to identify causal constructs that explain the data pattern from which the theorised potential for judicial revision of the interpretation of “true and fair” in line with “good faith” in legal regulation is derived.

Findings

The authors conclude that there is little doubt that a duty of good faith in relation to auditor-company contractual dealings and potentially a broader good faith duty to third parties such as investors in companies may be on the horizon.

Originality/value

In the context of stated objectives by organisations such as the International Federation of Accountants to reconcile ethical and technical skills in the wake of the global financial crisis, there is an increased need to rebuild public and investor confidence in the underpinning integrity of financial reporting. This paper offers a perspective on one way to achieve this by recognising the similarities in the information asymmetry relationships in the insurance industry and how the notion of “good faith” in that relationship could be useful in the audit situation.

Citation

Tarr, J.-A. and Mack, J. (2013), "Auditor obligations in an evolving legal landscape", Accounting, Auditing & Accountability Journal, Vol. 26 No. 6, pp. 1009-1026. https://doi.org/10.1108/AAAJ-03-2013-1262