Auditors

Question 1

What does an auditor do?

Answer 1

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

Question 2

Negligent auditor?

Answer 2

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

Question 3

An auditor can cease to hold office if…

Answer 3

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

Question 4

The first auditor?

Answer 4

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

Question 5

Appointment in private companies?

Answer 5

s485-488 - AGM etc

Question 6

Appointment in public companies?

Answer 6

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

Question 6

Appointment in public companies?

Answer 6

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

Question 7

Under insolvency legislation?

Answer 7

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

Question 8

Qualifications of an auditor?

Answer 8

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

Question 9

Auditor remuneration?

Answer 9

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

Question 10

Auditors have rights…

Answer 10

to companys books and accounts at all times

Question 11

It is a criminal offence to..

Answer 11

make false and reckless statements to auditors

Question 12

Termination of auditors appointments?

Answer 12

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

Question 12

Termination of auditors appointments?

Answer 12

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

Question 13

Section 485 CA?

Answer 13

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

Question 14

Companies (Audit Investigations and community enterprise) Act 2004

Answer 14

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

Question 15

Under CA 2006 auditors are required to investigate…

Answer 15

Whether the company has kept proper accounting records

whether the accounts are in agreement with the records

Question 16

When resigning…

Answer 16

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

Question 17

Liability of auditors…

Answer 17

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

Question 18

Formento Ltd v Selsdon Fountain Pen Co Ltd (1958)

Answer 18

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

Question 19

Re London and General Bank (1895)

Answer 19

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”

Question 20

Liability under statute

Answer 20

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

Question 21

If auditors destroy documents…

Answer 21

can be liable under theft act 1968

Question 22

To succeed in an act of negligence..

Answer 22

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

Question 23

Compare which 2 cases?

Answer 23

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

Question 23

Duties of auditors?

Answer 23

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

Question 24

Rights of auditors?

Answer 24

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

Question 25

Liability to third parties?

Answer 25

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

Question 26

Hedley Byrne v Heller 1963

Answer 26

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

Question 27

JEB Fasteners Ltd v Bloom (1980)

Answer 27

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

Question 28

Caparo Industries v Dickman 1990

Answer 28

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

Question 28

Caparo Industries v Dickman 1990

Answer 28

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

Question 29

Do auditors have duty of care to third parties?

Answer 29

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

Question 30

Auditor liability limitation agreements?

Answer 30

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