The Role of the Auditor

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Method

In the third chapter the method and methodology chosen for the study is presented. The authors describe the advantages and the disadvantages of the chosen research strategy and design, as well as the gathering of the data. The purpose of the section is to provide the reader with information about the working process and thus allow for individual interpretation of the result and reliability of the study, based on the selected methods.

Research Strategy and Design

According to Bryman (2012) one must distinguish between a quantitative research and a qualitative research. A qualitative strategy is characterised by great emphasis on formulations and vocabulary in the collection and analysis of data. Further it is based on, and influenced by interpretations and individual perceptions (Bryman, 2012). In contrast, a quantitative strategy focuses on collection of large amounts of data that shall not be influenced by either interpretations or individual perceptions (Bryman & Bell, 2013). In this study there was a need to thoroughly analyse the court cases to be able to answer the research question(s), therefore a qualitative strategy was considered appropriate. The chosen strategy is suitable as it allows for detailed analysis of the court cases and it offers the opportunity to highlight the present circumstances of the cases and the reasoning of the courts. A quantitative strategy would not have been appropriate as the focus of the study has not been to collect large amounts of data.
In the execution of the study one may choose between an inductive and a deductive approach to the relationship between theory and research. In a deductive approach the authors deduce a hypothesis from existing theory and in an inductive approach the theory is the outcome of the study (Bryman, 2012). According to Bryman (2012) a qualitative strategy mainly emphasises an inductive approach to the relationship between theory and research. In this study the authors have examined one court case thoroughly and a second court case has been included for informative reasons and to provide a deeper understanding of the BDO-case and its possible impacts. Based on the result of the study there has been a possibility to draw reasonable conclusions about the impact on auditor liability in Sweden. The intention has not been to confirm or reject a specified hypothesis. Instead it has been to analyse the cases and draw conclusions from them, therefore the method chosen for this thesis corresponds better to an inductive approach than a deductive.
The purpose of the study often indicates the research design best suited for the study (Yin, 2012). In this case the purpose of the thesis was to study how auditor liability has been influenced by the BDO-case. In order to fulfil the purpose of the study there was a need to carefully examine the court cases. According to Bryman (2012) and Stake (1995) a case study design is preferable under these circumstances as it is concerned with the complexity of the cases at hand and as it entails a detailed and intensive analysis of them. Therefore, the research design chosen for this study is the case study design. Further, the purpose has been fulfilled by a study of relevant theory, practice of law and analysis of the reasoning of the SC. Thus, a wide range of sources have been used. Yin (2012) argues that the case study design is favourable when this is the case as it offers the opportunity to take advantage of a wide range of sources, such as archival records, documents, interviews and observations (Yin, 2012). Though, one may not generalise from the results as only two cases are studied, this is a disadvantage of the chosen research design (Bryman, 2012). The case study design is one among several designs of conducting research. Another design that may have been appropriate for this study is the comparative design. In the comparative design the purpose is to use identical methods in the analysis of two contrasting cases, thus there is an emphasis on the comparison of the cases (Bryman, 2012). In this thesis two cases are included in the empirical study. Though, the intention has been to only analyse one of the cases thoroughly, the BDO-case. Additionally, the focus of the study has not been to make a detailed comparison of the cases. Thus, the case study design is considered more appropriate than the comparative design.
Within a case study design a distinction between a single case study design and a multiple case study design must be made. A single case study design is appropriate when the authors have access to a case that is revealing or a case that has attracted much attention, for example a case that has not been available for scientific observations earlier (Yin, 2006). The BDO-case was recently finalised and has been argued to be of relevance for auditor liability in Sweden (Awerstedt, 2014; Svensson, 2015; Svernlöv, 2014). Much attention has been paid to the case and the circumstances of it, however no scientific observations of it have been made so far. In this study, the main focus was to thoroughly analyse the chosen case and to fully understand how this specific case has affected auditor liability in Sweden, thereof, a single case study design is considered most suitable. One could argue that that this thesis is a multiple case study as there are two cases in the empirical data. Though, the multiple case study design is not appropriate for all types of studies, as it tends to make the researcher pay less attention to the specifics of the cases, and instead pay more attention to how to contrast the cases (Dyer & Wilkins, 1991). To contrast the cases from each other was not the purpose of this thesis. The BDO-case is the main focus and the Prosolvia-case is primarily included to indicate the differences of the judgment and to provide deeper understanding of the BDO-case and its possible impacts. Further, there are four different types of case study designs; descriptive, explanatory, cross case and case study evaluations. When researchers formulate a question, such as “what is happening or has happened?” a descriptive design is preferable. Descriptive case study is a common case study design as it can offer rich and revealing insights into a particular case (Yin, 2012). Thus, in order to fulfil the purpose, which is to describe possible impacts of the BDO-case on auditor liability, of the thesis the authors have chosen a descriptive case study design.

Research Method

The technique used to collect data is referred to as the research method (Bryman, 2012). The research method chosen for this study is an examination of documents and archival records consisting of legislation, case law and academic articles.

Empirical Data Collection

The majority of the rules and regulations for auditors and the audit are found within law and generally accepted standards. However, legislation often leaves room for individual interpretation, therefore case law is an important tool to understand how a particular law shall be interpreted. In this study, the main focus was aimed at understanding how a recent and relevant court case has affected auditor liability, thus it is an essential part of the empirical study.
In order to provide a rich and qualitative analysis and ultimately answer the research questions there was a need to demonstrate the full complexity of the BDO-case and parts of the Prosolvia-case that were of relevance for the study. Case law can be very comprehensive and complex, therefore it was of importance to use a well thought through technique to collect the relevant data. In the beginning of the process, an overall interpretation of the cases was made to sort out the data most relevant for the thesis as well as determine how to present it in the best way. Two main subjects were identified in the BDO-case, width of auditor liability and the causality judgment. To establish a good structure it was decided to use these main subjects as a base when collecting the empirical data from the case. The decision to focus on two subjects was motivated by the possibility to dig deeper into the areas of the case that were considered most prominent and important. By identifying two main areas, a better structure that was easy to follow and understand was established, it also formed the structure of the analysis. In this way it could be assured that all information included in the empirical data would be analysed and that the research questions would be answered. Further, the empirical data would then be more in-depth and not only touch the surface of the information. Though, other areas of the case, which could have been of relevance, were given less attention.
The empirical data starts with a short summary of the background of the case. This is followed by a detailed outline of the reasoning of the court, separated in the two subjects as previously mentioned, and lastly the final judgment. The same structure has been applied for the additional case, Prosolvia. Though, in the Prosolvia-case only the subject of causality has been examined since this was the part that was considered to be of relevance in comparison to the BDO-case. As the Prosolvia-case was finalised prior to the finalisation of the BDO-case it was logical to present the Prosolvia-case first and the BDO-case secondly. Further, as the purpose of the study was to examine the impact of the BDO-case on auditor liability in Sweden, the BDO-case constitutes 75 % of the empirical data, and the Prosolvia-case constitutes 25 %.

Selection of the Court Cases

To access the court cases the database “Karnov Juridik” was used. From previous knowledge and studies within the field, the authors were familiar with a recently finalised and debated court case that treated auditor liability, the BDO-case. It had been widely discussed in media and much attention was paid to the lawsuit and the final judgment. It was argued that the case had a major impact on the industry, on the profession and on auditor liability in particular (Awerstedt, 2014; Svensson, 2015), thus the case was considered appropriate for the study. Moreover, the BDO-case is case law as it has been treated by the SC, therefore it shall be precedent for similar types of lawsuits (Sveriges Domstolar, 2015), this indicate the significance of the case as it shall provide guidance in similar issues (Högsta Domstolen, 2014).
It was also chosen to include an additional case, the Prosolvia-case. The SC has not treated the case, thus it is not case law. The decision to include the Prosolvia-case was motivated by the similarity of the case compared to the BDO-case, though the outcomes were completely different. It was therefore considered interesting to examine some parts of the Prosolvia-case to analyse how the judges in the SC differed in their reasoning in the BDO-case, compared to the CA that judged the Prosolvia-case. The main focus was aimed at analysing the reasoning regarding the causality judgment. Thereof, the intention was to analyse one of the cases thoroughly, the BDO-case, and solely use the second case, the Prosolvia-case, for informative reasons and to indicate the differences that may occur in the judgment of disputes.

Empirical Data Analysis

A large amount of information is included in the empirical data of the thesis. Thus, a well-organised structure of the analysis was essential in order to be able to provide a rich and deep analysis, and ultimately answer the research questions. It was therefore chosen to have similar main areas in the analysis, as those in the empirical study. Thus, each section that is included in the empirical study was carefully analysed in order to examine possible indications and conclusions. Further, the headings relate to the research questions to ensure that all essential parts were included and thoroughly analysed. This was believed to result in a stronger analysis that was within the main thread of the thesis, but it would also offer enhanced understanding for the reader. Further, the theoretical framework is used throughout the entire analysis to confirm or reject the observations made in the empirical data.
To be able to answer the main question of this study: “How has the BDO-case affected auditor liability in Sweden?” the focus was primarily aimed at answering the sub-questions and conduct thorough analyses within the scope of those questions. By doing so, it was possible to draw conclusions that, in the end of the process, all together made it possible to answer the main question.

Criticism of the Sources

Regardless of the type of sources used in a study one must review them with a critical mindset and continuously be aware of their strengths and weaknesses (Bryman, 2012).
Documents and archival records constitute the information included in this thesis, therefore the source criticism is directed toward this type of sources. In order to understand how auditor liability has been affected by case law it was essential to analyse the information in the chosen cases, thus it was appropriate to use secondary data in the study. Though, a study that is exclusively based on secondary data implies a risk as secondary sources generally are not impartial and they may be considered incomplete (Lundahl & Skärvad, 1999). Nevertheless, there are many advantages of secondary data. It provides reliable and high quality data as the sampling procedures generally have been more rigorous than what one is likely to achieve in a student thesis. Additionally, the data is easy and inexpensive to access (Bryman, 2012). The authors have put a great effort to find relevant and reliable articles from well-known publishers. Despite this there is always an inherent risk for misstatements and flaws, but there has been an effort to decrease the risk of errors caused by non-reliable sources.

Quality of Method

Reliability

The strengths of the case study design are that it allows in-depth studies of one specific case and that it enables the use of a variety of documents (Yin, 2012). In this study it was essential to thoroughly analyse two specific cases and for this purpose, the chosen method was considered appropriate. When conducting a research with a qualitative strategy there is a probability that the result is influenced by the authors’ interpretations and perceptions (Bryman & Bell, 2013). The authors have translated and interpreted the court cases which implies that the result of the research may be somewhat influenced by their interpretation. There has been an effort to maintain objectivity by the use of a variety of sources and reliable information. Additionally it has been an effort to limit individual interpretation by the use of academic articles as well as by the use of statements by authorities. As noted by Bryman (2012) academic articles cover the research done within the area and contribute with different opinions and perspectives. The academic articles used in the thesis are written by researchers within the relevant area as well as been cited in other academic articles. Additionally, they have a wide time perspective, which is believed to contribute to increased objectivity. Thus the risk that the authors’ interpretations influence the result is decreased and the result of the thesis is argued to be reliable. In the starting phase of the thesis it was considered whether to conduct interviews for increased reliability. This could have broadened the author’s perspective and contributed with valuable insights from experts in the industry. Though, this would have been associated with complexities. It was considered difficult to obtain a sufficient amount of data to be able to withdraw conclusions from the information and it would have meant that the study would have been mirrored by the individual views of the auditors. This was not in line with the purpose of the study and was not considered to contribute to greater credibility. Instead, the interest of the authors was to investigate the impact of the BDO-case on auditor liability and this was argued done most appropriately without the use of mirrored opinions of auditors.

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Replicability

A specific court case is permanent and will not change. Though, when searching for court cases at a later moment the outcome may not be the same as there are on-going processes, such as the case concerning Kraft & Kultur. The court cases chosen for this study are finalised and if they would be analysed from the same perspective by other researchers a similar result should be reached. Though, this assumes that the same information is collected from the cases, this is not given as authors may consider different information relevant. Further, as mentioned previously, an inherent risk of a qualitative strategy is that the result is somewhat influenced by the authors interpretations and perceptions (Bryman & Bell 2013). Therefore, the possibility for the research to be replicated at a later moment and show the same result is not given.

Validity

The thesis has been structured in a way that makes it complicated to generalise from the result. This is a common concern about case studies (Yin, 2012). The result only suggests possible developments based on two cases, it does not provide any generalizable beliefs about other cases, such as the on-going lawsuit concerning Kraft & Kultur. Since all cases are unique there is no single solution that applies to all. However, the SC has addressed specific issues in the BDO-case, additionally the case is case law which implies that the same reasoning shall be applied in similar cases (Sveriges Domstolar, 2015). It is nevertheless important to note that external validity may be reduced as the result may be influenced by the interpretation of the authors. Hence, several cases could have been included to increase the validity. However, it is complicated to find case law with the same attributes that are possible to compare with each other on the same basis.

Empirical Data

In this section the authors present the empirical findings of the study. Two court cases are presented, the Prosolvia-case and the BDO-case. For enhanced understanding the cases have been structured similarly and with a focus on causality and width of auditor liability. The authors have chosen to present a short background of the cases followed by claims, reasoning and lastly the judgment.

Prosolvia (T 4207-10)

Background

T 4207-10 (Prosolvia-case) is a case between two parties, the Prosolvia’s bankruptcy estate and the audit firm PwC with the responsible auditor Nils Brehmer (N.B.), finalised in 2013. In 1995 Prosolvia hired PwC, and N.B. was appointed the responsible auditor. N.B. submitted an unqualified audit report in April 1998, regarding the financial year 1997 (T 3715-01, p. 22). Prosolvia was a successful and rapidly expanding business within the IT-sector, in 1997 Prosolvia was listed on OMX Stockholm (T 3715-01, p. 23). One year later, the Swedish newspaper Dagens Industri published an article concerning accounting irregularities in the financial statement. This was followed by negative attention in the media as well as on the stock market (T 3715-01, p. 25). The Stockholm stock exchange decided to do a year review of the company in which several errors were found, revenues and receivables were inflated by 128 M SEK and the financial statement did not provide a true and fair view of the company. Prosolvia was imposed with a fine and the share price was negatively affected (T 3715-01, p. 26). After this, funding of the business became impossible, customers and cooperation partners were negative and a new share issue was not possible. Prosolvia became incapable of paying their debts and in December 1998 they filed for bankruptcy (T 3715-01, p. 26).

Claims

The bankruptcy estate accused N.B. for negligence in the process of the audit of the financial year 1997 (T 4207-10 p. 34). It was argued that PwC had failed to perform the audit in accordance with appropriate law and audit standards (T 4207-10, pp. 76-77). It was argued that the negligence by the auditor was the reason for the negative attention, which consequently resulted in bankruptcy (T 4207-10 p. 34).

Reasoning – Causality

The CA concluded that PwC had deviated from Audit Standards in the audit of the administration, financial statements and the annual report and the interim reports (T 4207-10, p. 57, 69, 73). The CA clarified that according to the 29th chapter §2 of the Swedish Companies Act (2005) an auditor may be liable towards a company if he fails to accomplish his role as a controlling function. It was concluded that PwC were negligent in their role and that they should compensate the damage (T 4207-10, pp. 75-76). The CA concluded that it was a matter of a financial loss and that Prosolvia had the evidential burden in terms of the negligence by the auditor, the occurrence of the damage and the size of it (T 4207-10, pp. 79-84).
To require liability for damages there must be causality between the neglectful act and the damage. In determining whether there was causality or not, the CA applied a method where it was examined if the damage would have occurred if the action was not taken. If the damage would have occurred regardless of the neglectful act there would have been an indication that the action had not caused the damage. This method was associated with complexities as it was a matter of failure to act by the auditor and not an action taken by him. It was therefore decided to apply the reasoning of another recently finalised case, the Landskrona-case (NJA 2013 p. 145; T 4207-10, p. 127). The case concerned arson and property damage, and thus another area of law. Despite this, the CA considered it useful in order to examine causality in the event of failure to act by an auditor (T 4207-10, p. 84). The case concerned a 13-year-old girl who was taken care of due to mental illness. While being temporarily placed at her mother’s house she started a major fire. It was argued that the social service department, who was responsible for the girl, had acted negligently as they failed to supervise the girl, thus the municipality of Landskrona was sentenced with liability for damage for those affected by the fire (NJA 2013 p. 145). In the Landskrona-case it was considered that there were difficulties in the judgment of causality in the event of failure to act, therefore it was decided to introduce evidentiary alleviation for the injured party. According to the CA, evidentiary alleviation would be applied for Prosolvia as well (T 4207-10, p. 84).
The injured party had to present a hypothetical sequence of events, in which the damaging party did not act neglectfully and the damage did not occur (T 4207-10, p. 86). Prosolvia presented several hypothetical sequences of events where they avoided bankruptcy (T 4207-10, p. 86). First, the CA examined whether there was causality between the claimed misstatements in the accounts and the negative media attention (T 4207-10, p. 92). PwC argued that the information in the media did not conform to the misstatements that the bankruptcy estate claimed. The bankruptcy estate argued that there was no need for precise conformity and the CA agreed with this reasoning, thus causality was indicated (T 4207-10, p. 93). Secondly, it was examined whether the negative media attention caused the loss of confidence in the company (T 4207-10, p. 94). Lastly, it was examined whether the loss of confidence in the company had caused the incapability to pay the debts. The CA stated that it was a complex matter as it concerned a judgment of a hypothetical sequence of events, therefore the judgment may be built upon assumptions and experience. Due to the complexity of the matter, the CA applied evidentiary alleviation with the requirement that the sequence had to be “probable” (T 4207-10, p. 97). The CA made the assessment that there was a causal relationship between the loss in confidence and the incapability to pay the debts, and further that it was likely that Prosolvia in the hypothetical sequence would have been able to pay their debts and thus survived. It was estimated that the company value would have amounted to 650 Million SEK if the auditors had not acted negligently. The CA concluded that there was a causal relationship between the negligence by the auditor and the damage (T 4207-10, p. 103).
Further, on one half of a page it was examined whether there was adequate causality. It was concluded that the negative outcome of the auditor’s negligence was expected and predictable. Thus, adequate causality was indicated (T 4207-10, p. 104).

Judgment

The CA concluded that PwC and N.B. were severally liable for damage towards Prosolvia’s bankruptcy estate. They were sentenced to pay a 2,1 Billion SEK fine (T 4207-10, pp. 1-2). PwC appealed to the SC, though the case was never treated, the parties reached conciliation and PwC paid a 742,5 Million SEK fine. PwC had no possibility to seek for recourse as the period of limitation had expired (T 4207-10, p. 122).

BDO (NJA 2014 p. 272)

Background

NJA 2014 p. 272 (BDO-case) is a case between the parties Antilu, the audit firm BDO and the responsible auditor B.O. H.J., the owner of Antilu, had his placings in an endowment insurance owned by Ancoria Insurance (Ancoria). H.J. was one of the main shareholders in the company 24hPoker. In 2006, the publicly listed company Daydream offered to acquire all of the shares in the company 24hPoker. In contrast to 24hPoker, Daydream was a publicly listed company traded on OMX Stockholm. A prospectus was published on the 2nd of May 2006 and the acquisition was carried out on the 31st of May 2006. In early May 2005, B.O. was appointed the responsible auditor in Daydream. B.O. performed the audit for the financial year 2005 as well as reviewed parts of the prospectus5, which formed the basis for the acquisition offer for the owners of 24hPoker. After the issuance of the shares, H.J. argued that misleading information in the financial statements had fooled him and that he used the audited financial statement as a base for his decision to accept the terms of the acquisition. B.O. did not leave any remarks in the audit report regarding the company’s accounts (NJA 2014, pp. 272-273).
The share price decreased immediately after the acquisition was finalised, and kept decreasing afterwards. H.J. sold his shares in 2006 and in 2008, the average price decreased from 4 SEK / share to 0,66 SEK / share (NJA 2014, p. 273). After the acquisition of 24hPoker, a new board of directors was appointed in Daydream, the new board hired the audit firm PwC to review the accounts. Inaccuracies were found, the goodwill account had not been reviewed in accordance with Audit Standards and B.O. had failed to take into account that one of the subsidiaries had a payment obligation of 900 000 SEK concerning an EU contribution (NJA 2014, p. 273). The new board of directors and OMX Stockholm reported B.O. to the Supervisory Board of Public Accountants, who gave B.O. a warning. The reason for the warning was B.O.’s deviation from Audit Standards and that he disregarded his obligations as an auditor. The circumstances were considered extraordinary as Daydream was a publicly listed company. After the inaccuracies were found it was decided to liquidate the business (NJA 2014, pp. 274-275).

Table of Contents
1 Introduction
1.1 Background
1.2 Problem Discussion
1.3 Research Questions
1.4 Purpose
1.5 Delimitations
1.6 Outline
2 Frame of Reference
2.1 The Role of the Auditor
2.2 Liability for Damage
2.3 Expectation Gap
3 Method
3.1 Research Strategy and Design
3.2 Research Method
3.3 Quality of Method
4 Empirical Data
4.1 Prosolvia (T 4207-10)
4.2 BDO (NJA 2014 p. 272)
5 Analysis
5.1 Prosolvia-Case – Causality
5.2 BDO-Case
6 Conclusion
6.1 Discussion
6.2 Suggestions for Further Research
6.3 Societal & Ethical Issues
7 References
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