The Gazette 1992

MARCH 1992

GAZETTE

It is therefore apparent that in Irish courts the standard of care required from auditors extends to such matters as attendance at stock- takings and is not restricted to the limits of SSAPs. The English courts have taken the view that an auditor need not check that a company owns or possesses the stock in trade stated in its accounting or stock records, nor need he value its stock in trade, work-in progress or finished products. 15 He should, however, ensure that he is furnished with a certificate showing the amount and value of stock in trade, work in progress or finished goods. If the certificate agrees with the accounts he need investigate no further. This position is to be contrasted with American law where an auditor is required to check stock or to qualify his report indicating that he had not done so. 16 The liability of an auditor in respect of the system used to keep records of stock has also been considered by English courts. He is not expected to have an expert understanding of the investigate the stock just because the company's accounts or stock records show it as worth more than a person experienced in that kind of business might expect. However where it was very excessive he would be required to investigate. 17 It can be argued however that an auditor's duty in relation to stock is and should be greater than this. This is particularly the case given that the area of stock is an area of notorious subjectivity in accounts. It is increasingly the practice that auditors make a number of random checks of items of stock to establish that they are valued correctly. This verification can be cross checked with the cost accounts of the company. Such a practice will continue to establish a duty to investigate stock. SSAP 9 requires that stock should be shown in the financial accounts at . . the lower of cost or net realisable value". There can be handling of the company and therefore is not required to

representatives, and government agencies. Each of these groups has specific financial interests in the reporting company, and the major question facing an auditor is whether or not he has any duty or responsibility to protect these interests with respect to the audited financial statements. "An increasing problem for the auditor . . . is the multi purpose usage of audited financial statements by persons other than shareholders and their advisers . . . . the major question facing an auditor is whether or not he has any duty or responsibility to protect these interests . . . ." In addition, the position of a company is dynamic in terms of its attractiveness as an investment and its positioning in relation to other players in the industry is central to the issue. This results in many other parties having an interest in the accuracy of accounts and the liability of auditors in this context must be considered. If the auditor fails in his duty of performing his statutory duty with reasonable care and skill he will be liable to the company for any damages which it may sustain as a result of his negligence. He will also be liable in the tort of negligent misstatement to persons to whom he owes a duty of care when performing his statutory duties. 21 There is no necessity for a contract or a fiduciary relationship to exist in order for such liability to attach. Liability will arise in tort for an auditor or an accountant if he knowingly provides false information debenture or loan security holder or to a prospective investor. 22 Where false information or unsound advice is tendered by an auditor or an accountant regarding the company's position, knowing that it will be relied upon, liability will also arise. 23 Auditors will be held liable where about the company's financial position to a member, creditor,

significant differences between these two valuations and the decision as to which valuation to take will vary between classes of stock. Net relalisable value by nature is an estimate and this introduces a large amount of subjectivity in itself. The definition of the appropriate cost figure is also to some extent a subjective matter as to timing. Thus not only does subjectivity arise as to the type of valuation but also in relation to the valuation itself. Thus the role of the auditor is of great significance as a balance to such inherent subjectivity. Reliance on company records An auditor need only examine the records and vouchers kept by the company which a company of its type would normally be expected to keep, together with such other documents as the directors or officers of the company produce to him. He will not be guilty of a breach of duty if he fails to discover an irregularity which can only be company which are not produced to him. 18 However, he must compare the company's cash records with its bank paying-in books and cheque counterfoils and undertake a reconciliation with a bank statement. 19 He cannot rely on the officers or employees of the company in relation to such records. The auditor is also under a duty to examine the invoices received by the company to determine whether there are debts due from the company which have not been represented in the accounts. In addition where there are invoices which are normally received at regular intervals the auditor should investigate to establish if there are any outstanding amounts due. 20 Liability to parties other than shareholders An increasing problem for the auditor in recent years is the multi- purpose usage of audited financial statements by persons other than shareholders and their advisers - for example lenders and bankers, creditors, employees and union traced from other unusual or informal records kept by the

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