Caparo Industry Case

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The application of the law of tort in the auditing has been shaped by a number of leading cases. The most well known one is the Caparo Industries Plc (Caparo) v Dickman (1990). This case arose in the context of a negligent preparation of accounts for a company. It defines the scope of the assumption of responsibility, and what the limits of liability are. Caparo Industries Plc v Dickman 1990 2 AC 605[1] Fact; Fidelity were audited by the defendants, Touche, Ross& Co which submitted an unqualified audit report. However, the audit report is not accurate, it estimated 1.3 million profit for the year ended 1984.In fact, the audit report should show a 400 000 loss of the fiscal year. Caparo, the existing shareholder in Fidelity, acquired 30% of Fidelity ’s issued share based on the misstated profit. As a result, Corpora made a substantial loss. The House of Lord asserting that the auditor owes no duty of care either to the public or to Caparo Industry. The House of Lord conducted a narrower test for the duty of care based on Ø Foreseeability of damage; the loss is a reasonably foreseeable consequence of the defendant’s conduct. Ø Proximity of relationship; there is at least some ‘proximity’ relationship between the defendant and the pursuer Ø Reasonableness; it is fair to impose a liability on the defendant. Firstly, the auditor could not foresee the damage that will cause to Caparo by his conduct. Furthermore, there was not sufficient proximity between Caparo and
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