Auditors' Liability, Case Study Heath LLP is a firm of chartered accountants which has audited Roath plc since 1991. Roath plc is an oil refining company with annual turnover of £2bn. and net profits of £350m. In January 2013, during the audit of the financial statements for the year ended December 31, 2012, the audit team discovered that contract documentation?for a number of purchase orders for crude oil from one supplier, Canton, were missing. The total value of the missing contracts came to £5m. The matter was raised with the purchasing director, John Splott, who had to approve all purchase contracts prior to payment. Splott initially dismissed it on the grounds that it was immaterial, the total cost of oil purchases was in excess of £1bn. When pressed by the audit manager, he gave assurances that these were valid transactions made with reputable suppliers. However, he promised that when he had spare time, he would instruct staff to find the missing documents. In fact, the middle of 2013 proved to be a turbulent time for oil producers with continued unrest in the Middle East and in Russia. Roath's staff were under pressure with routine work and the missing documents were never found. The issue of the missing documents was one of the outstanding matters discussed at a meeting between the audit team and the audit partner, Ravi Rhymney, in February 2013. Rhymney raised the matter with the finance director, Brian Tremorfa, at a meeting in May prior to the signing of the auditors' report. Tremorfa said that they had more important things to worry about; he assured Rhymney that he had no doubts about the transactions but he promised to look into the matter of the missing documents and to tighten up controls in that area. Rhymney accepted these assurances. He had worked under Tremorfa when the latter was a partner in Heath LLP. Tremorfa resigned from Heath in 2010 and joined Roath in 2012. During the next audit early in 2014, the auditors discovered that the system had not changed since their audit last year. Again documents supporting purchase contracts with the supplier, Canton, could not be found. This time the auditors extended their testing and discovered more unsupported transactions totalling more than £20m. The audit manager quizzed Splott who became increasingly agitated. Eventually he admitted to having a close working knowledge of Canton since he was a director of that company too. He begged the audit manager not to tell the other board members of Roath. The audit manager told him that he would have to report it to the audit partner who would almost certainly want to report it immediately either to the board or to the audit committee. The next day Splott failed to show up for work and could not be contacted on his home phone or on his mobile. That same day, Tremorfa ordered a detailed investigation. This investigation eventually discovered that Canton was a 'shell' which had invoiced Roath, and been paid, for supplies of oil totalling £45m, oil which had never been received. Required: a) Advise the partners of Heath LLP on their likely legal position, if Roath plc were to sue them for negligence in the conduct of the audit. b) Outline the steps prudent auditors take to reduce the risk of claims for negligence.

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