The Gazette 1992

GAZETTE

MARCH 1992

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.

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.

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

handling of the company and

therefore is not required to

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.

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

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

traced from other unusual or

informal records kept by the

company which are not produced to

him.

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.

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.

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

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.

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

about the company's financial

position to a member, creditor,

debenture or loan security holder or

to a prospective investor.

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.

Auditors will be held liable where

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