Introduction

Section 143(1) which specifies powers and duties of auditors and auditing standards is applicable to all the companies alike, whether public or private companies. Sub-section (1) of section 128 provides that the books of account should give a true and fair view of the state of affairs of the company or its branch, as the case may be, and explain its transactions. The books should keep on accrual basis and according to double entry system of accounting. Section 128 of the companies Act, requires that every balance sheet of the company should give a true and fair view of the state of affairs of the company as at the end of the financial year and every statement of profit and loss of the company for financial year and they should comply with the accounting standards. Therefore, to find out whether books of accounts as required by law have been kept by the company, whether provisions of the Act in this regard have been complied with and whether the said financial statements are in agreement with the books of accounts and returns and whether they represent a true and fair view, an auditor is appointed, who is required to, report on these aspects. The auditor owes a duty to the shareholders of the company to ensure that the rights of the shareholders are safeguarded. The examination by an independent agency such as the auditor is practically the only safeguard which shareholders have against the enterprise being carried on in a business like way of their money being misapplied or misappropriated without their knowing anything about it. The purpose of a statutory audit is to provide a mechanism to enable those having a proprietary interest in the company or being concerned with its management or control to have access to accurate financial information about the LLP company. Provided that those persons have that information, the statutory purpose is exhausted. What those persons do with the information is a matter for them and falls outside the scope of the statutory purpose. In the present case the company based its case not upon any lack of information on the part of the director who was the mind and will of the company, caused by negligent audit but rather upon the opportunity that the possession of the auditor’s certificate is said to have given for the company to continue to carry on business and to borrow money from third parties. Such matters do not fall within the scope of the duty of the statutory auditor.

auditor

The definition of the auditor was thus stated in Australian case: “An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the auditor to verify the balance-sheet. The main objects of any audit are:

  • To certify to the correctness of the financial position shown in the balance sheet, and the accompanying revenue statements;
  • The detection of errors;
  • The detection of fraud. The detection of fraud is generally regarded as being of primary importance;

In a decision of the Supreme Court the position of the auditor under the companies Act is thus explained: “The audit is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the directors with a view to inform the shareholders of the true financial position of the one person company. The directors occupy a fiduciary position in relation to the shareholders and in auditing the accounts maintained by the directors, the auditor acts in the interests of the shareholders who are in the position of the beneficiaries”. The duties cast upon the auditor are accompanied by the certain powers to enable him to discharge these duties effectively. These duties and rights cannot be limited or abridged in any way. Thus, a resolution limiting the powers of the auditor or a provision to this effect in the Articles of Association will be void. Any regulations which preclude the auditors from availing themselves of all the information to which they are entitled, are inconsistent with the act.

Audit and auditor

The shareholders of a company have mainly to depend upon the good faith and efficiency of the auditor appointed to check the accounts and certify the balance sheet of the company, the auditors do have a chance to make a detailed check of the accounts, call for information and satisfy themselves that the accounts have been properly maintained and the balance-sheet fairly drawn up. The auditors are, therefore, under duty to safeguard the rights of the shareholders the activities of the directors in the purported exercise of their powers in dealing with assets of the company. It is of the highest importance that auditors of the partnership companies, whose shareholders are dependent chiefly on the auditor’s skill and vigilance, should perform their duties with scrupulous care. They are bound to make a reasonable examination of the accounts to see that the dealings are not in any way illegal or improper, and it is their duty to uncover such activities. They must, therefore, assert independence and not bring loss to the members or the public by their complicity with the directors or persons in control of the company’s affairs in illegal or irregular transactions. It is, therefore, necessary that in addition to prescribing specifically the duties which have been suggested above, the council of the Institute of Chartered Accountants should be called upon to formulate a code in regard to the audit of the accounts of public companies with special reference to safeguarding the interest of members of the public who have put their faith in the Board of Directors and contributed to the share capital.

Position of auditor

An auditor has a fiduciary relationship, the shareholders as a body. However, he is not obliged to respond to letters from individual shareholders or disclose any information to individual shareholders. Therefore, if an individual shareholder has any query or questions regarding the accounts, he should address it to the company and not to the auditor. Auditor is not an officer of the company. Before the commencement of the Amendment Act of 2000, an auditor was an officer of the company in respect of certain matters relating to winding up. Thus, auditor is an officer contemplated by law to protect interests of company and its shareholders, as such he is there having certain duties prescribed by the Act.

Auditor is not an adviser

An auditor is not concerned with the policy of the company. It is not part of an auditor’s duty to give advice, either to directors or shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders.

Auditor is not an insurer

An auditor of a company is not an insurer and does not guarantee that the books of the company show the true position of its affairs or that its balance sheet is accurate according to the books. But it is his duty to ascertain and certify to the shareholders the true financial position of the company at the time of the audit.

Auditor as an agent

The extent to which an auditor can be regarded as an agent of the company or of the shareholders who appoint him was considered by the House of Lords in Spackman versus Evans where it was held that the auditors may well be regarded as agent of the members appointed to carry out certain duties as laid down by the Act and by a particular company’s articles. The House of Lords added that this status would be confined only to the purposes of audit and would not extend to impute to the shareholders a constructive notice of the facts coming to the knowledge of the auditors; not they would be regarded as agents for acknowledging a debt on behalf of the company.

Auditor, not a circle of management decisions

The auditor does not sit on judgment on management decisions, policies or the commercial prudence of transactions. He is primarily concerned with carrying out what may be termed as verificatory audit. However, with the introduction of section 143(1)(a) the duty of a company’s auditor is beyond more verification of the books of accounts. He is required to make a statement on various matters involving control, adequacy of internal control procedures and internal audit etc.,

Auditor is a watch-dog, not a bloodhound

It has become common place to quote a figure of speech employed and say that the auditor is only a watch-dog and not a bloodhound, which, casting the metaphor aside, means that his duty is verification and not detection. But does not verification extend to being vigilant? Is not watch dog bound to bark and chase too where necessary? If when sniffing around, you hit upon a trial of something wrong, is exposed? An officer or, an employee of the company may not be appointed as an auditor. An auditor must be independent of the Board of Directors of the company. He is expected to play the role of a watch-dog on behalf of the shareholders of the company.

Scope of auditor’s duty of care

The court had to examine the scope of the auditor’s duty to detect a fraud being carried out by the company. The company’s directing mind and will was arranging for the company to defraud its bank. The bank successfully sued to the company. The auditors failed to detect the fraud. The question was whether the company was entitled to claim damages from the auditors. The court did not allow such recovery. The company itself was a fraudster. It could hardly ask the auditors that they should have detected its fraud. The court stated some of the applicable principles.

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