Supreme Court: "Accounting Firms Not Liable for Some Errors if Duty of Care Was Fulfilled"

[Asia Economy Reporter Kim Hyung-min] The Supreme Court has ruled that if an accounting firm fulfills its duty of care in corporate audits, it cannot be held liable even if there are some errors in the financial statements.

The Supreme Court's First Division (Presiding Justice Lee Ki-taek) overturned the previous ruling that partially favored plaintiff A and others, investors in Solomon Savings Bank corporate bonds, in their damages lawsuit against Anjin Accounting Firm, and remanded the case to the Seoul High Court on the 4th.

The court stated that while accounting firms have an obligation to secure evidence necessary for audits, the responsibility to prevent and detect fraudulent accounting lies more heavily on the company.

It also pointed out that the underestimation of the allowance for loan losses at Solomon Savings Bank was noted, but it was difficult to view Anjin Accounting Firm as negligent in its audit duties.

The court said, "If the auditor has fulfilled the ordinary duty of care according to auditing standards, it is reasonable to consider that the auditor did not neglect their duties even if some fraud or errors are found in the financial statements."

A and others invested in subordinated bonds of Solomon Savings Bank around March 2010. However, after the bank went bankrupt, they filed a lawsuit against Anjin Accounting Firm, which issued an unqualified opinion in the audit report.

The plaintiffs claimed that although the bank falsely recorded financial statements by classifying non-recoverable loan receivables as normal receivables and underestimating the allowance for loan losses, Anjin Accounting Firm did not point this out in the audit report.

The first trial dismissed the damages claim, stating that A and others did not submit evidence to prove Anjin Accounting Firm's liability.

The second trial ruled partially in favor of A and others, finding that although Anjin Accounting Firm pointed out during the audit process that the bank should set additional allowance for loan losses, the bank did not reflect this and falsely recorded the financial statements, and the firm issued an unqualified opinion without proper verification, thus holding Anjin Accounting Firm partially liable for damages.