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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.
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-
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-
Margo Ford.
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