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Audit reports are a common source of information for investors. Many rely on the balance sheet and the audit report to assess a corporation's worth. Some investors go as far as considering an audit a reliable guide to a corporation's financial health. With this kind of expectation, litigation against auditors after an unsuccessful investment is not uncommon.

After a collapse, the audit firms and their insurers are often the only ones with deep pockets; the members of the board regularly either vanish, are in prison or are insolvent, and legal remedies taken against them are almost always fruitless. And hitherto this kind of litigation has been on the increase.

In particular, the additional duties in the new corporate law — requiring auditors for instance to act on behalf of the board if the board does not notify the bankruptcy judge in the event of the company losing all its equity — was a favoured resort for investors seeking redress for their losses. However, all that could change following a recent decision of the Commercial Court in Zurich.

The facts of the case are as follows. An investor bought all the shares of a company. Shortly after the acquisition the company was declared bankrupt. The investor was unable to obtain satisfaction from the seller and turned to the auditors. He argued that their report did not properly reflect the financial situation of the company at the time of the purchase. Based on corporate law auditing rules, several asset positions should have been written off in the balance sheet. However, the Commercial Court of Zurich rejected this argument on reasons of principle. It denied the investor's claim without even inquiring into the soundness of the depreciation. The Court stated that an auditor's report is an information tool for the shareholders and the creditors of the company rather than external investors. The auditors should therefore not — with a few exceptions — owe any duty of care to investors. As a consequence, the Court denied any liability of the auditors the plaintiff investor.

What does this decision, should it be confirmed by the Federal Supreme Court, mean for the investor in Switzerland? It will certainly become more difficult to blame auditing firms for investment losses. With some exceptions, auditors will be protected from investors who were not creditors or shareholders at the time the audit report was established. As a further consequence, investors can no longer rely solely on the yearly sources of information when making their investment decisions (due diligence reports and so on). Otherwise, they may not be able to overcome the auditor's defence that it was not the flaws in the audit report but rather the assumption of risk by the investors which caused the investment loss.

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