The Scope of the Duty of Care Required of the Auditor
- The Supreme Court has ruled more than once that the duty of care includes two main components that are intertwined: a conceptual duty of care and a concrete duty of care. The conceptual duty of care of an auditor vis-à-vis the company audited by him derives from Regulation 4 of the Accountants Regulations (Method of Operation of an Accountant), 5733-1973 (hereinafter: the "Accountants Regulations"), which states that "an accountant shall conduct the audit with proper professional care". This duty is expressed in the obligation to carefully examine and examine every detail and information and to investigate real suspicions, and obligates the auditing accountant to expect that the client may be harmed if negligent audit work is performed. The concrete duty of care is examined according to the specific circumstances of the case, such as representing the client before the tax authorities or conducting an annual audit (Civil Appeal 4024/13 Tikva - Village for Vocational Training in Giv'ot Zeid in Tax Appeal v. Aryeh Pinkovich, 79 [Nevo] (August 29, 2016) (hereinafter: "the Tikva case"); Civil Case (Central District) 18337-08-10 Shankol Marketing (1937) in Tax Appeal v. Somekh Chaikin, paras. 58-60 (February 10, 2019) (hereinafter: "the Shankol case"); Civil Case (Tel Aviv District) 53621-05-11 Hananya Gibstein v. Kesselman & Kesselman Registered Partnership, para. 15 [Nevo] (October 13, 2016)).
- The test for examining the negligence of an auditor is an objective test of a "reasonable accountant" in the circumstances of the case. The accountant is not required to have the skill level of a "perfect accountant" and does not guarantee that the reports will be completely error-free. His duty is to take reasonable precautions only, and an honest mistake in exercising his professional judgment does not, as a rule, establish liability in torts (Criminal Appeal 494/76 Anonymous v. Anonymous, 31(3) 38, 50-51 (1977) (hereinafter: "Anonymous Case"); Class Action (Economic) 61115-01-12 Mibel Investments in Tax Appeal v. Aurora Fidelity Trust Company Ltd., para. 139 [Nevo] (October 27, 2013) (hereinafter: "Mabel Investments");Civil Case (Haifa District) 1009/00 Israel Discount Bank in Tax Appeal v. Broida & Co., Accountants, 52 [Nevo] (June 22, 2008) (hereinafter: "the Broida case")).
- The auditor is one of a group of professional entities external to the corporation known as "Gatekeepers". Its main role is to ensure the interest of the investing public in obtaining reliable and accurate information regarding the financial situation of the corporation, while using its extensive professional knowledge in tax and accounting law (Civil Appeal 3506/09 Shlomo Sayig v. Kesselman & Kesselman Accountants, 21 [Nevo] (April 4, 2011) (hereinafter: "the Sayig case"); Assaf Hamdani, "The Responsibility of Gatekeepers in the Capital Market," Mishpat Ve-Business 5, no. 38 (2006)). Beyond the technical examination, the accountant serves as a supervisor and auditor vis-à-vis the company's officers and organs. The purpose of the accounting firm in a modern corporation is to supervise the board of directors on behalf of the shareholders, and therefore it must maintain complete independence from the audited body (Tikva case, para. 79; Yosef Gross Companies Law 763 (2015) (hereinafter: "Gross")).
- As part of his role as a gatekeeper, the accountant cannot be satisfied with a mechanical examination of references. He must approach the audit work with "exploratory glasses", carefully examine every detail and information, investigate any real suspicions that arise regarding the entry in the books, and get to the root of the financial situation of the audited entity in order to ensure a match between the actual situation and what is presented in the reports. If there is any doubt as to the correctness of the statements, he must make comments or record a reservation in his opinion (Criminal Appeal 2910/94 Ernest Yefet v. State of Israel, 5(2) 353, 445-446 (1996) (hereinafter: "the Yefet case"); The Hirshberg case, paragraphs 245-246; Criminal Appeal 709/78 State of Israel v. Unknown Persons, 34(3) 673, 680 (1980) (hereinafter: "Unknown Persons Case"); Civil Appeal 7406/22 Binyamin Dardor v. Shlomo Levy, 13 [Nevo] (August 9, 2023) (hereinafter: "the Dardor case"); The matter of hope, verse 79; the matter of Shankol, at verse 58; Civil Case (Tel Aviv District) 1492-07 and Forget Ltd. v. Porat Weksler Kodenchik & Co., CPA, paras. 21-22 [Nevo] (September 27, 2010)).
- Beyond Section 4 of the Accountants Regulations, the duty of care is also anchored in legislation. Section 170 of the Companies Law establishes the responsibility of the Comptroller towards the Company and its shareholders:
"170. (a) The auditing accountant is responsible to the Company and its shareholders for what is stated in his opinion regarding the financial statements.