Auditors’ Negligence and Professional Misconduct in India: A Struggle for a Consistent Legal Standard

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. In India, gross negligence is regularly used in disciplinary proceedings against auditors and also by the Securities and Exchange Board 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 discuss this Indian legal standard in detail. Using the statutory framework that governs auditors as a backdrop, this paper examines all reported High Court decisions from the 1950s till 2019 along with decisions of the Securities and Exchange Board with regards to an auditor’s duties. We find that the approach used to discern the existence of gross negligence across these decisions has 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, this inconsistent approach poses a problem. 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 National Financial Reporting Authority in its decision-making process.