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GAZETTE
DECEMBER 1989
under Section 391 for indemnity.
The Court has a residual power to
grant relief to the auditor if it is
satisfied that "he has acted honestly
and reasonably and that, having
regard to all the circumstances of
the case, including those connected
with his appointment, he ought
fairly to be excused".
If a company auditor finds that he
is unable to fulfil his duties due to
a refusal or failure on the part of the
directors to supply him w i th
accurate or sufficient information,
he may have no option but to resign
from his office before the expiration
of his term or before the next annual
general meeting. The new Bill allows
such a resignation subject to certain
conditions. Section 171 provides
that a duly appointed auditor may,
by way of a notice in writing, resign
during his term of office, provided
he reports to the members (by way
of a written statement) any prob-
lems or irregularities in the com-
pany's affairs of which he is aware
and which are connected with his
resignation. If there are none, he
must provide them with a state-
ment to that effect. The company
itself is obliged to serve copies of
the statement on the Registrar and
all those entitled to attend at a
general meeting. Should an auditor
be found to have acted from
improper motives in circulation and
content of his statement, he may
find himself liable for the costs of
any court application for an order
relieving the company from the
Section's service obligation. The
Court may grant such relief if it is
satisfied that the rights conferred on
the auditor by the Section are being
abused to "secure needless pub-
licity for defamatory matter". The
Bill does not appear to have en-
visaged the auditor being made a
party "notice or otherwise" to such
an application. The Section repeats
in part Section 161 of the Com-
panies Act 1963.
SUMMARY
In the present economic climate,
companies' audited accounts are
increasingly being relied upon for
financial information by those wish-
ing to invest in the company. They
are no longer examined by the
company management alone when
plotting the course of its financial
management and reviewing its
performance.
The growth in the number of
cases being brought against com-
pany auditors must be attributed to
the increased circulation of informa-
tion contained in audited accounts
and audit reports to existing and
potential investors. The company
auditor should be aware of this
when certifying the accuracy of the
accounts and in writing up his re-
port for presentation to the share-
holders' meeting.
It is clear from recent case law
that the statutory auditor will not be
held liable for loss occasioned by a
misleading or inaccurate audit to
those who, without his knowledge
or foresight, relied on the audit. If he
was, or ought to have been aware,
that a particular party would be
relying on the accuracy of the audit
then the auditor may owe him a
duty of care, even though he is
under no duty to report to him
directly. This potential liability rests
on recent developments in the law
on negligent mis-statement. This
issue of liability is decided on the
basis of forseeability, the closeness
of the relationship and, possibly, on
the fairness of imposing liability on
the auditor in the circumstances.
The parties to whom the statu-
tory auditor may incur liability
should he fail to conduct his audit
with due care, skill and attention,
and the nature of that liability, may
be summarised as follows:-
a) The Company
His contract is with the company
and, consequently, he may be
liable to it in damages for breach
of contract should he cause the
company economic loss through
a badly conducted audit.
He may also have concurrent
liability for negligence and
negligent mis-statement. Again,
the company must prove an
economic loss resulting from the
auditor's negligence.
In addition he may incur statu-
tory liability in a subsequent
liquidation situation under S298
of the Principal Act and S198 of
the new Bill.
b) The Shareholders
The auditor's relationship with
the shareholders has been des-
cribed as one akin to contract,
but his potential liability to them
is tortious. He is under a duty to
report accurately to them on the
company's financial position. If
he should not do so then the
company auditor may find him-
self liable to compensate the
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shareholders (as a body and
possibly individually), in dam-
ages for negligence and negli-
gent mis-statement for any
resultant economic loss,
c) Investors
The negligent auditor's potential
liability to an investor depends
on whether he knew, or ought to
have known, that that particular
investor would be relying on his
audit. He owes no duty of care
to potential investors as they are
innumerable and cannot be
identified with any certainty.
Although the company auditor
cannot be expected to guarantee
the accuracy of the figures,
opinions and forecasts in his
audit report, he must exercise
the standards of care, skill and
diligence of a suitably qualified
and experienced member of his
profession in conducting the
audit. It is vital, therefore, that he
keep up to date with develop-
ments in general auditing
practices, and that the profes-
sion circulate guidelines to all its
members on a regular basis.
Following these guidelines is
perhaps the best way of
minimising the risk of incurring
liability.
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