A Step Too Far for Gatekeepers?

Statutory Auditor Liability for Financial Misstatements in Japan and Australia

Abstract

The seal of approval that an auditor stamps upon corporate financial disclosures relies on the auditor’s own reputation for impartiality, thereby serving to reassure investors that the audit has been conducted at arm’s length. Yet in 2015, the emergence of an accounting scandal perpetrated by the Japanese corporate stalwart Toshiba for lengthy period of time rocked the impartiality the auditing profession rests upon. Incidents such as the Toshiba accounting scandal demonstrate that in order for the auditing profession to function as intended for investors, a regulatory framework equipped with robust penalties is required when the incentive to maintain an impartial reputation is no longer sufficient to motivate the auditor to rigorously perform its duties.

This paper compares the statutory claims that can be made against auditors for financial misstatements in Japan and Australia. A key feature that distinguishes the two countries is the chosen approach to apportioning liability. Whilst Japan apportions liability on a joint and several basis so as to attribute the whole of an investor’s losses to each party that has been proven to have contributed to the investor’s loss, Australia allows liability to be apportioned on a proportionate basis between wrongdoers. Australia’s adoption of proportionate liability is in part a result of the auditing profession having persuaded lawmakers that imposing liability on a joint and several basis exposed its members to an unsustainable level of liability.

Despite this, the experiences between the two countries do not show a clear correlation between proportionate liability and a net reduction in the level of liability that auditors are exposed to. Rather, Japan provides a basis for suggesting that a stable level of liability risk for auditors can be maintained under a system that continues to impose joint and several liability. At least in Japan, the facet of statutory financial misstatement claims that is most relevant to the liability share of an auditor is the selective application of evidentiary presumptions, as these encourage claims to be made against the issuer rather than the auditor.