The Gazette 1989

GAZETTE

DECEMBER 1989

under Section 391 for indemnity. The Court has a residual power to grant relief to the auditor if it is satisfied that "he has acted honestly and reasonably and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused". If a company auditor finds that he is unable to fulfil his duties due to a refusal or failure on the part of the directors to supply him w i th accurate or sufficient information, he may have no option but to resign from his office before the expiration of his term or before the next annual general meeting. The new Bill allows such a resignation subject to certain conditions. Section 171 provides that a duly appointed auditor may, by way of a notice in writing, resign during his term of office, provided he reports to the members (by way of a written statement) any prob- lems or irregularities in the com- pany's affairs of which he is aware and which are connected with his resignation. If there are none, he must provide them with a state- ment to that effect. The company itself is obliged to serve copies of the statement on the Registrar and all those entitled to attend at a general meeting. Should an auditor be found to have acted from improper motives in circulation and content of his statement, he may find himself liable for the costs of any court application for an order relieving the company from the Section's service obligation. The Court may grant such relief if it is satisfied that the rights conferred on the auditor by the Section are being abused to "secure needless pub- licity for defamatory matter". The Bill does not appear to have en- visaged the auditor being made a party "notice or otherwise" to such an application. The Section repeats in part Section 161 of the Com- panies Act 1963. SUMMARY In the present economic climate, companies' audited accounts are increasingly being relied upon for financial information by those wish- ing to invest in the company. They are no longer examined by the company management alone when plotting the course of its financial management and reviewing its performance. The growth in the number of

cases being brought against com- pany auditors must be attributed to the increased circulation of informa- tion contained in audited accounts and audit reports to existing and potential investors. The company auditor should be aware of this when certifying the accuracy of the accounts and in writing up his re- port for presentation to the share- holders' meeting. It is clear from recent case law that the statutory auditor will not be held liable for loss occasioned by a misleading or inaccurate audit to those who, without his knowledge or foresight, relied on the audit. If he was, or ought to have been aware, that a particular party would be relying on the accuracy of the audit then the auditor may owe him a duty of care, even though he is under no duty to report to him directly. This potential liability rests on recent developments in the law on negligent mis-statement. This issue of liability is decided on the basis of forseeability, the closeness of the relationship and, possibly, on the fairness of imposing liability on the auditor in the circumstances. The parties to whom the statu- tory auditor may incur liability should he fail to conduct his audit with due care, skill and attention, and the nature of that liability, may be summarised as follows:- a) The Company His contract is with the company and, consequently, he may be liable to it in damages for breach of contract should he cause the company economic loss through a badly conducted audit. He may also have concurrent liability for negligence and negligent mis-statement. Again, the company must prove an economic loss resulting from the auditor's negligence. In addition he may incur statu- tory liability in a subsequent liquidation situation under S298 of the Principal Act and S198 of the new Bill.

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shareholders (as a body and possibly individually), in dam- ages for negligence and negli- gent mis-statement for any resultant economic loss, The negligent auditor's potential liability to an investor depends on whether he knew, or ought to have known, that that particular investor would be relying on his audit. He owes no duty of care to potential investors as they are innumerable and cannot be identified with any certainty. Although the company auditor cannot be expected to guarantee the accuracy of the figures, opinions and forecasts in his audit report, he must exercise the standards of care, skill and diligence of a suitably qualified and experienced member of his profession in conducting the audit. It is vital, therefore, that he keep up to date with develop- ments in general auditing practices, and that the profes- sion circulate guidelines to all its members on a regular basis. Following these guidelines is perhaps the best way of minimising the risk of incurring liability. •

c) Investors

b) The Shareholders

The auditor's relationship with the shareholders has been des- cribed as one akin to contract, but his potential liability to them is tortious. He is under a duty to report accurately to them on the company's financial position. If he should not do so then the company auditor may find him- self liable to compensate the

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