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Audit failure, litigation, and insurance in early twentieth century Britain

The relationships between audit failure, judicial fault-finding and the availability of professional indemnity insurance have been debated by legal and accounting writers in both academic and professional circles. This paper adds an historical perspective to the current literature by presenting a review of cases involving allegations of auditors’ negligence over a fifty year period starting with the first significant case involving the question of auditors’ duties. Amateur auditors who failed to carry out a proper audit could expect little sympathy in the professional press but when large law suits were brought against recognised accountants, the profession was forced to consider the risks of the consequences of adverse judicial decisions. It was not long before practitioners sought to manage those risks through professional indemnity insurance. However, we find no evidence that the availability of insurance increased auditors’ risk by opening the floodgates of litigation.