Every company must have an external auditor whose responsibility is to examine the company’s books, accounts, vouchers and other information and make a report for submission to members at the general meeting.
The report must contain the auditor’s opinion on the accounts. The auditor’s task is deemed complete when his report is handled over to the company secretary.
Appointment of Auditors
Auditors may be appointed either the directors, the AGM or the Registrar.
• Appointment Directors
The first auditors of the company may be appointed directors before the first AGM. Such auditors hold office until the conclusion of the meeting. However their appointment may be confirmed if the notice of a resolution to do so has been given to members within 14 days before the meeting.
Directors may fill a casual vacancy in the office of auditor.
• Appointment the members/ AGM
Every company must at each AGM appoint an auditor to hold office from the conclusion of that meeting to the conclusion of the next AGM
However, at every AGM a retiring auditor is to be reappointed without resolution being passed unless:
He is not qualified for reappointment.
He has given the company a written notice of his unwillingness to be reappointed.
The meeting has resolution resolved to appoint some other person auditor.
The meeting has expressly resolved not to reappoint him.
However if an AGM appoints some other person auditor who subsequently dies or is incapacitated or disqualified, the retiring auditor is not deemed to be automatically reappointed.
If at an AGM no auditor is appointed or deemed to be reappointed, a vacancy arises in the office of auditor and the Registrar must be notified within 7 days failing which the company and every officer in default are liable to a default fine.
• Appointment the Registrar
If the AGM fails to appoint an auditor and no auditor is deemed to be reappointed, the Register may upon notification appoint a person to fill the vacancy
Qualifications of the Auditor
To qualify for appointment a person must be registered accountant practicing accountancy individually or as a partner in a firm.
For one to be appointed as an auditor he must meet the following requirements:
1. Must be a member of a professional body specified in the first column of the schedule to the accountants Act.
2. Must be authorized the registrar as one with similar qualification obtained in the United Kingdom
The following persons are not qualified for appointment as auditors
• A body corporate.
• An officer or employee of the company.
• A partner or employee of an officer or employee of the company
• A person disqualified for appointment as auditor for the holding company is likewise disqualified for appointment as auditor for the subsidiary.
• Undischarged bankrupts and
• Persons of unsound mind are disqualified for appointment the company law.
If a disqualified person is appointed auditor the person, the company and every officer of the company in default are liable to a fine.
Remuneration of Auditors
The term “remuneration” refers to any sums paid the company in respect of his expenses. The auditor’s remuneration may be fixed by:
• Directors if appointed them.
• The cabinet secretary if appointed him.
• By the company in a General meeting.
• In the manner determined the company in General meeting.
Rights of Auditors
i) Right to access books of account, and vouchers: Under section 162 (3) every auditor has the right to access to the books accounts and vouchers of the company.
ii) Right to demand information and explanations: the auditor is entitled to require from officers of the company such information and explanation as he thinks necessary.
iii) The right to a notice of intended resolution to appoint some other person auditor.
iv) The rights to all notices and other communication sent to members. v)Right to seek professional advice whenever necessary.
vi) Right to attend all general meetings of the company.
vii) The right to rely on information provided trusted officers of the company.
viii) The right to remuneration for services rendered.
ix) The right to make representation as a defense to that notice.
x) The right to be heard at general meeting on any matter concerning him as auditor.
xi) The right to be compensated/indemnified for any loss or liability arising in the course of discharging his obligations.
xii) A right of lien over the company’s assets in his possession to enforce the right of remuneration.
Duties / Obligations of Auditors The statutory duty
The statutory duty of auditors is to report to the members whether the accounts give a true and fair view and have been properly prepared in accordance with the Companies Act. They must also:
State whether or not the directors’ report is consistent with the accounts
For quoted companies, report to the members on the auditable part of the directors’ remuneration report including whether or not it has been properly prepared in accordance with the Act.
Be signed the auditor, stating their name, and date. Where the auditor is a firm, the senior auditor must sign in their own name for, and on behalf, of the auditor.
To fulfill their statutory duties, the auditors must carry out such investigations as are necessary to form an opinion as to whether:
(a) Proper accounting records have been kept and proper returns adequate for the audit have been received from branches.
(b) The accounts are in agreement with the accounting records.
(c) The information in the directors’ remuneration report is consistent with the accounts.
The auditors’ report must be read before any general meeting at which the accounts are considered and must be open to inspection members. Auditors have to make disclosure of other services rendered to the company and the remuneration received.
Common law duties of an Auditor
1) Duty to examine the accounts of the company: it is the duty of the auditor to examine the accounts of the company, its balance sheet, profit and loss account and any group accounts vouchers and other material information and make a report for submission to members at general meeting during his tenure of office. The auditor’s report must be read out before the company in general meeting and must be accessible to members.
2) Duty to acquaint himself with his duties: He is bound to acquaint himself with his duties under Companies Act and the Articles of the company.
3) Duty to execute his task with an inquiring mind: It is the duty of the auditor to execute his task with an inquiring mind and not with a pre-gone conclusion of dishonesty. In the words of Lopes L.J Re Kingston Cotton Mills (No. 2 1896), “An auditor is not bound to be a detective… to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is watchdog but not a bloodhound.”
4) Duty to satisfy himself that the company’s securities exist: An auditor is obliged to satisfy himself that the company’s securities exist and are in safe custody. However whether he must
inspect the documents or accept the assurance of the officer of the company in possession depends on the circumstances of the case in the words of Romer J in Re: City Equitable Fire Insurance Co. (1925): “It is the duty of a company’s auditor in general to satisfy himself that the securities of the company in fact exist and are in safe custody and whenever an auditor discovers that the securities of a company are not in proper custody it is his duty to require that the matter be put right at once.”
5) Duty to exercise reasonable care, skill and caution: An auditor is bound to exercise reasonable care, skill and caution. The standard of care and skill expected of an auditor is that of a reasonably competent careful and cautious auditor. In the words of Lopes L.J in Re: Kingston Cotton Mills (No 2 1896):“… it is the duty of an auditor to bring to bear on the work he has to perform that skill care caution which a reasonably competent careful and cautions auditor would use. What is reasonable care, skill and caution must depend on the particular circumstances of each case.”
6) Duty to Act honestly: An auditor is bound to Act honestly. He must not certify as true what he does not believe to be true and must take reasonable care and skill before certifying something as true. In the words of Lindsey J in Re: London and General bank (1895) “An auditor however is not bound to do more than exercise reasonable care and skill in making inquiries and investigations… he must be honest, he must not certify what he does not believe to be true and he must take reasonable care and skill before he believes that what he certifies is true.”
7) Duty to provide professional advice whenever called upon:It is the duty of the auditor to provide professional advice whenever called upon to do so. It was so held in Tomenta v. Selsdon (Foundation) Pen Co Ltd.It is not the duty of the auditor to take stock. In Re Kingston Cotton Mills Lopes L.J observed, “It is not the duty the duty of the auditor to take stock. He is not a stock expert. There are many matters in respect of which he must on the honesty and accuracy of others. He does not guarantee the discovery of all fraud.”
Is an auditor an investigator? No
Question has arisen as to whether the auditor is an investigator. As appointed at general meeting or directors or the registrar he is not an investigator hence his primary duty is to examine the company’s books, accounts, vouchers other documents and considers any other necessary information for the purpose of making a report for submission to members at a general meeting. The auditor must approach his task with an enquiring mind. It has been observed that he is a watchdog but not a bloodhound. His standards of care and skill are that of a reasonably competent careful and cautious auditor. He is not bound to do more. He does not guarantee the discovery of all fraud, nor does he guarantee that the c company’s business has been prudently or imprudently carried on. However he must satisfy himself the company’s securities exist and are in safe custody.
However an auditor may be deemed to be an investigator in certain circumstances.
• If appointed to investigate the affairs of a company.
• If there is anything calculated to excite his suspicion he must probe it to the bottom.
The duties of an auditor are owned to the company as a legal person. There is a contractual relationship between the auditor and the company. However in certain circumstances the auditor
owes a legal duty of care to existing and potential shareholders whom he knows or reasonably ought to foresee will rely on his audit and report.
Removal of Auditors
The provisions of the Companies Act confer upon a company the power to remove an auditor from office a resolution at general meeting. Under section 160 (1)
• A special notice of the intended resolution to remove an auditor from office must be given to the company.
• Upon receipt of the notice the company must send a copy thereof to the auditor concerned.
• The auditor is entitled to make written representations not exceeding reasonable length as his defense and may request the company to notify its members the fact that he has made representations.
• The company must convene an extraordinary general meeting to determine the issue. A special notice of the intended resolution must be sent to every member and members must be notified that the auditor has made representations if any.
• Copies of the representations must be enclosed with the notice of the meeting and sent to the members. If this is not possible reason of lateness or default the company, the auditor is entitled to have them read out at the meeting. However, copies of the auditor’s representations need not be sent to members or be read out at the meeting if upon application the company or any other aggrieved party, the Court is satisfied that the auditor is abusing the right to be heard to secure needless publicity for defamatory purposes. The Court may order the company’s cost of the application be paid wholly or in part the auditor.
Liability of Auditors
Liability to the company
i. Damages for professional negligence
The company has an action in damages against an auditor who has failed to exhibit the care and skill of a reasonably competent, careful and cautious auditor.
The company must prove that some other auditor would have acted otherwise.
ii. Damages for misfeasance
Although an auditor is not an officer of the company properly so called, case law demonstrates that he may be held liable in damages for misfeasance committed or omitted in the course of discharging his obligations.
This was the case in Re: London General Bank where an auditor had failed to detect that certain items had been over valued resulting in dividends being paid out of capital and it was held that the auditor was liable in damages for the misfeasance.
Liability to third parties
As a general rule, auditors are not liable to third parties.
The auditor has a contractual relationship with the company and it is therefore the company to whom the duty is owed.
Since the decision in Hedley Byrne v Heller it has been clear that a person may be liable for financial loss resulting from a negligent statement even if there is no contract between the maker of the statement and the recipient.
Plaintiff was an advertisement agency, working for a company called Easipower.
The Plaintiff was concerned about the financial position of Easipower, and sought help through their bankers, who obtained information through the Defendant [Heller], the banker of Easipower.
The Defendant, through statements and documents marked’without responsibility on the part of this bank [Defendant], replied that Easi power is in good a financial position. This was done a couple of times.
Plaintiff relied on this when making investments and later Easi power went bankrupt, causing the plaintiff financial loses.
Therefore, a third party who suffers loss or damage reason of relying on the audit, and its report may hold the auditor liable if it is proved that:
1. There was a special relationship between the auditor and the party and therefore the auditor owed the party a legal duty of care.
2. The auditor knows or reasonably ought to have known that his audit and report was to be relied upon.
3. The auditor broke his duty of care.
4. The third party suffered loss of a financial nature.