Auditors’ negligence and professional misconduct in India: a struggle for a consistent legal standard

Abstract

Gross negligence is a severe form of negligence. Its severity has been characterized using the presence of a mental element or mens rea accompanying the negligent act. Within the context of professional negligence, gross negligence is important as it constitutes professional misconduct. For auditors, a finding of professional misconduct through disciplinary proceedings can result in suspension or expulsion from the profession. The Securities and Exchange Board of India also uses this concept to determine whether an auditor has violated any securities regulations. Given the implications of a finding of gross negligence on the practice of an auditor, this paper seeks to examine the legal standard in detail. The paper examines all reported High Court decisions from 1950s till 2019 and finds that the standards applied by the High Courts have been inconsistent. In the absence of any precedent from the Supreme Court of India that details what comprises gross negligence in the context of auditors, the inconsistent approach of the High Courts poses a problem. The Supreme Court decision in the P.K. Mukherjee case (1968) dealt with an auditor’s misconduct, however, it did not examine the question of gross negligence. This paper offers a starting point for a discussion to minimize the uncertainty currently associated with auditors’ liability for professional misconduct, especially hoping to assist the newly established the National Financial Reporting Authority in its decision-making process.