Auditors Flashcards by Annie Groom

What does an auditor do?

Provides a true and fair view of company’s financial poisition
Every company is required to have one - law imposes restrictions on who can act as auditor
Person who false informs auditor or omits information commits criminal offence under CA

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Negligent auditor?

Liable in tort and contract but can exclude liability through liability limitation agreements

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An auditor can cease to hold office if…

they resign
removed by members
not reappointed once terms of office expire

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The first auditor?

Must do a set of accounts before first AGM, if happy they will be asked to continue for the year

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Appointment in private companies?

s485-488 - AGM etc

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Appointment in public companies?

s385(3)(4) - if directors fail to appoint auditor company may do it in general meeting
s489 - required to appoint an auditor from end of one meeting to end of next meeting
Should be a really good reason for not reappointing auditors

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Appointment in public companies?

s385(3)(4) - if directors fail to appoint auditor company may do it in general meeting
If this fails secretary of state can appoint
s489 - required to appoint an auditor from end of one meeting to end of next meeting

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Under insolvency legislation?

Auditors are officers of the company and can be charged with criminal offences or liable for civil offences in connection with winding up of company
Auditors can be found guilty of insider dealing, or if they knew a person was laundering money and failed to report suspicions

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Qualifications of an auditor?

Eligible under rules and recognised by a regulatory body
Required to hold professional accountancy qualification
Ineligible if partner of an employee or officer of company
‘appropriate qualification’ - s1212 CA

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Auditor remuneration?

s492 - Whoever appoints the auditor has the power to fix their remuneration and must be disclosed in a note to the accounts

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Auditors have rights…

to companys books and accounts at all times

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It is a criminal offence to..

make false and reckless statements to auditors

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Termination of auditors appointments?

Passing of ordinary resolution at general meeting - special notice required and members and auditors must be notified (28 days)

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Termination of auditors appointments?

Passing of ordinary resolution at general meeting - special notice required and members and auditors must be notified

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Section 485 CA?

Auditor of private company must be appointed for each financial year unless director says otherwise

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Companies (Audit Investigations and community enterprise) Act 2004

s8 - criminal offence to fail to provide information or explanations required by auditor
- entitles auditor to require information and explanations from wider groups of people than merely officers of company
s9 - directors reports must contain that they are not aware of relevant information that has not been disclosed to auditors

Under CA 2006 auditors are required to investigate…

Whether the company has kept proper accounting records

whether the accounts are in agreement with the records

When resigning…

Must inform why… resignation must be accompanied by statement of any circumstances that the auditor believes should be brought to attention of members and creditors, if so may require a meeting with company to discuss these circumstances

Liability of auditors…

Owe a duty of skill and care to company and are potentially liable where shareholders may suffer loss as a result of negligence
Under CA 2006 - criminal offence for auditors knowingly or recklessly causing an audit report including a misleading, false or deceptive matter s507

Formento Ltd v Selsdon Fountain Pen Co Ltd (1958)

Denning “An auditor must approach his work with an inquiring mind - not suspicious of dishonesty but ensuring no mistakes have been made”

Re London and General Bank (1895)

Lindley, LJ “he is not an insurer, he does not guarantee that the books do correctly show the true position of the company’s affairs”

Liability under statute

Civil liability - insolvency act 86 s212 - auditors may be liable for financial damages in respect of civil offences of misfinance or breach of trust
Criminal liablility - s 206-211 IA 86 - criminal offences involving officers in a winding up including auditors

If auditors destroy documents…

can be liable under theft act 1968

To succeed in an act of negligence..

must prove duty of care
must prove duty was breached
breach caused loss (financial loss with auditors)
Sarbanes oxley act - enron
PwC admitted 8000 breaches

Compare which 2 cases?

extent of duty Re Kingston cotton mill (1896) - Lindley "An auditor is a watchdog not a bloodhound, he is not bound to be a detective" However in Re Thomas Gerrard and Son Ltd (1967) - failed to investigate a red flag and was liable - found invoices he thought were altered but didnt do anything

Duties of auditors?

Section 495-498 Must make a report to all companys members sent to them. Must include introduction identifying audited accounts Must state clearly whether in their opinion the accounts give a true and fair view Must carry out investigations to determine and report if adequate records are not kept, do not agree with records or fail to obtain info necessary

Rights of auditors?

Section 499-500 Right of access to company's books, accounts and vouchers and require information necessary Require company to obtain from overseas subs info Attendance at general meetings To speak at AGMs

Liability to third parties?

Candler v Crane Christmas (1951) - D owed no duty of care to P in preparing accounts. Denning thought D were liable as they knew the accounts were to be shown to P but other lords overruled and said an auditor has to believe in the truth of the accounts - in contrast to a lawyer who usually believes little of what the client says Auditor is called upon to state his belief in the accounts

Hedley Byrne v Heller 1963

It doesn't matter what the outcome was, there was a disclaimer on the audit report, this was enough to prevent liability A duty of care exists where there is a special relationship

JEB Fasteners Ltd v Bloom (1980)

Does an auditor have liability to a member of public? Auditors prepared accounts they knew to be false They had a duty of care and was foreseeable that a third party may seek to rely on the accounts

Caparo Industries v Dickman 1990

Tripartite test for duty of care: foreseeability, proximity and whether it is fair reasonable and just that a duty of care should exist PLC auditors do not owe duty of care to public who rely on accounts when deciding to buy shares DOC is owed to company and not individual shareholders Nothing in statutory duties to suggest that they were intended to protect interests of investors in market

Caparo Industries v Dickman 1990

Do auditors have duty of care to third parties?

RBS v Bannerman (2002) Bannerman audit firm failed to spot fraud and company went into receivership They claimed they had no DOC to the bank There was no disclaimer, crucial feature of this case, they were liable and should have spotted the fraud

Auditor liability limitation agreements?

CA 2006 s534-8 Shareholders can vote by ordinary resolution to limit potential liability of auditors by means of agreement Must be disclosed in annual reports and accounts Cannot limit liability of auditors to an amount that is less than what is fair and reasonable