The Gazette 1989

GAZETTE

DECEMBER 1989

The Company Auditor - Principles of Civil Liability

Under Section 160 of the Compenies Act of 1963, en Auditor must be eppointed et eech A.G.M. to conduct the annuel audit and to produce a certified set of accounts together with an auditor's report for presentation to members of that company in general meeting.

panies (No. 2) Bill 1987, the professional accountancy bodies must adopt standard codes of conduct for their members, together with means of enforcement. The codes will be of great assistance to the Courts in providing them with a guide to good accountancy practice. Should he fail to exercise due care in fulfilling his auditing duties, the company auditor may incur statutory, contractual and/or tortious liability. I propose to deal with each in turn. Statutory Liability The duties of the Company Auditor under present legislation are to cer- tify the Annual Accounts, Balance Sheet, Profit and Loss Account and group accounts, approve the Directors' Report and to prepare his own Report for presentation to the members of the company. He is not responsible for ensuring that the Auditor's Report actually reaches the members. In carrying out his statutory duties, the Company Auditor acts as an officer of the company and, as such, he may be the subject of Secion 298 mis- feasance proceedings. It should be noted that if the particular auditor's contract included duties and obliga-

The function of the statutory auditor was examined by Lindley L.J. in Re London 8t General Bank (No. 2) [1895] 2 Ch. 673. He stated at p. 682 that " It is no part of an auditor's duty to give advice, either to the directors or shareholders as to what they ought to do . . . His business is to ascertain and state the true financial position of the company at the time of the audit and his duty is confined to that". An auditor may incur liability in the carrying out of his statutory duties, but he cannot protect him- self by restricting his activities to arithmetical calculation and strict verification of figures. As Lord Denning put it in Fomento (Sterling Area) Limited -v- Selsdon Fountain Pen Company [1958] 1 WLR 45:- "His vital task is to take care to see that errors are not made, be they errors of computation or errors of omission or commission, or downright untruths . . . he must come to it with an enquiring mind, not suspicious of dishonesty". An auditor should not only check the accuracy of the figures supplied to him but also examine the accounting systems used by the company in producing figures. In Kelly -v- Boland [1989] ILRM 373 at p. 388 Mr. Justice Lardner stated: " I t is clear that an auditor cannot conduct an examination of all the company's transactions during the particular period. He is concerned to see that there is an adequate and proper system for recording transactions, that such transactions are properly authorised and that the assets of the company are properly looked after and safeguarded". Should an auditor encounter a point of law in conducting the audit, he may feel able to deal with the problem himself, but he is

entitled to seek legal advice and the terms of his appointment must be interpreted as covering his seeking such advice (Bevan -v- Webb [1901] 2 Ch 59). It is in the area of tort that the Company Auditor's liability in common with that of other financial advisers has undergone major change in recent years. The present article will therefore concentrate on tortious rather than contractual and statutory liability.

By Margo Ford, B.A., LL.B. Barrister-at-Law

The standard of care to be exer- cised by an auditor in carrying out his duties was examined by Hanna J. in Leech -v- Stokes [1937] IR 787. The auditor had been engaged to prepare the annual Profit and Loss Accounts for income tax purposes. He certified the accuracy of the accounts, having failed to detect embezzlement by a company clerk. Af t er examining the relevant authorities, Hanna J. stated at p.798, that the duty of the auditor was "under the circumstances of the particular case and of his em- ployment to exercise such skill and care as a diligent skilled and cautious auditor would exercise according to the practice of the profession". In the case of Kelly -v- Boland, supra, Mr. Justice Lardner accepted evidence of S.S.A.P.'s as good evidence of the standard of care appropriate to auditors in con- ducting an audit. The evidence of expert witnesses is also heavily relied upon, as it is in all professional liability cases. Under the new Com-

Margo Ford.

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