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Liabilities of Auditors under the Act

General

• S.174(8): auditor duty to report tothe Reistrar

!uty to disclose identities of

"rondoer directors to #inorityshareholders

•  $he auditor of a co#pany has a duty

to disclose to #inority shareholdersthe identity of potential defendantsin a suit for breach of %duciary duty

by a director of a co#pany.

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 $eoh &en &he '. an *o.

•  $he plainti+ allered that the director of

the co#pany had ta,en ad'antae of theirposition and had utilised funds of theco#pany for their o"n pri'ate purpose inbreach of their %duciary duty "hich they

o"ed to #e#bers of the co#pany. $heauditors had prepared three set of draftstate#ent of accounts "herein the plainti+had detected certain #aterialdiscrepancies.

•  $he plainti+ "as unable to obtain the fullinfor#ation pertainin to the disclosure of

the true identities of the "rondoers--.

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• -.. "ho "ere in breach of their

%duciary duty arisin fro# the#isuse of such funds of the co#panyecept fro# the defendant auditor.

• /n this case0 the ih *ourt hadapplied the principle in NorwichPharmacal Co. v. Customs and ExciseCommissioners and adopted in FirstMalaysia Finance Bhd v. Dato MohdFathi bin Hj hmad in comin! to itsdecision.

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/##unity aainst defa#ation suit

• S.174A(1): an auditor of a co#pany is protected

fro# a defa#ation suit by any person in respectof any state#ent0 "hether #ade orally or in"ritin0 "hich the auditor #a,es in the course ofhis duties as auditor.

• Such protection is a'ailable to the auditor "henhe has #ade the state#ent "ithout #alice on hispart.

• S.174A(2): a person shall not0 in the absence of#alice on his part0 be liable to any action for

defa#ation at the suit of any person in respect ofthe publication of any docu#ent prepared by anauditor in the course of his duties and re3uiredby or under the Act to be loded "ith the

Reistrar.

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Liability for elience

 !uty of care

*andler c. *rane0 *hrist#as *o

•  $he #a5ority decision of the 6nlish *ourtof Appeal held that auditors and

accountants o"ed no duty of care toanyone but their clients.

• !ennin L.. in his dissentin 5ud#ent saidhe thouht that the la" "ould fail to ser'e

the best interests of the co##unity if itshould hold that accountants and auditorso"ed a duty to no one but their clients.

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edley yrne*o.'.eller '.&artners

• /t is clear that a professional persons

o"es a duty of care in nelience inrespect of #isstate#ents causin%nancial loss.

•

/n order to attach liability to the#a,er of the state#ent0 there has tobe a 9special relationship eistinbet"een the #a,er and the person

relyin on that state#ent.

•  $he e+ect of edley yrne "asneatly su##arised by Lord ;li'er in:<

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*aparo /ndustries plc '. !ic,#an

• is Lordship epressed the 'ie" that

a 9special relationship bet"een the#a,er of a state#ent (ad'iser) andthe person relyin on that state#ent

(ad'isee) eist "here:<1. $he ad'ice is re3uired for a purpose0

"hether particularly speci%ed or

enerally described0 "hich is #ade,no"n0 either actually or byinference0 to the ad'iser at the ti#e"hen the ad'ice is i'en=

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2. $he ad'iser ,no"s0 either actually orby inference0 that a his ad'ice "ill

be co##unicated to the ad'isee0either speci%cally or as a #e#ber ofan ascertainable class0 in order thatit should be used by the ad'isee forthat purpose=

>. /t is ,no"n0 either actually orinferentially0 that the ad'ice so

co##unicated is li,ely to be actedon by the ad'isee for that purpose"ithout independent in3uiry= and

4. /t is so acted on by the ad'ise to his

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?ooney ;rs '. &eat ?ar"ic,0 ?itchell *o Anor @?alaysia case

•  $he plainti+s in that case "ereshareholders of a co#pany and theybrouht the action aainst the accountantsand secretaries of the co#pany ("ho "ere

also auditors) allein breach of theirduties.

•  $he defendants applied to stri,e out theclai# as disclosin no reasonable cause of

action on the basis that the case fell "ithinthe a#bit of the rule in Foss ". Harbottle sothat the proper plainti+ in the case "ouldbe the co#pany and not the shareholders.

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•  $he application "as dis#issed by the court.Ra5a ABlan Shah . ha'in referred toedley yrne said that:<

9 edleys case is concerned "ith theproposition that "here'er there is arelationship e3ui'alent to contract there is aduty of care0 and the relationship #ay beeither of eneral character0 for ea#ple0 therelationship of solicitor and client or ofban,er and custo#er0 or of a particular

character created ad hoc. $he speech of Lord!el'in contains ecerpts "hich / thin, arefarsihted. e re#ar,ed that the relationship#ay "ell o beyond contract0 and / 3uote:

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< C there #ay "ell be others yet to beestablished- *ases #ay arise in the future in"hich a ne" and "ider proposition0 3uiteindependent of any notion of contract0 "ill beneeded.D

• As eneral rule0 an auditor of a co#pany0 in

auditin the accounts under the Act0 o"es noduty of care to #e#bers of the public atlare "ho ha'e failed on the auditedaccounts to buy shares in the co#pany.

• Eurther#ore0 an auditor o"es no duty of careto indi'idual shareholders in the co#pany"ho ha'e relied on the audited accounts tobuy #ore shares in the co#pany.

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aparo n us r es p c '.!ic,#an ;rs

•  $he ouse of Lords held that the auditors did

not o"e a duty of care to the respondent.•  $he purpose of the audited accounts

prepared by the auditors "as to enable theshareholders as a body to eercise infor#ed

control of the co#pany and not to enable theindi'idual shareholders to buy #ore shares inthe co#pany "ith a 'ie" to pro%t.

•  $he auditors statutory duty to prepare

accounts "as o"ed to the body of theshareholders as a "hole and not to indi'idualshareholders or the public at lare.

6 E t Ltd ? ,

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 6 Easteners Ltd '. ?ar,s0loo# *o

• oolf . applied the 9reasonable foreseeabilitytest to deter#ine "hether auditors o"ed a dutyof care to a plainti+ "ho had relied on accountsthat had been neliently prepared by theauditors.

•

 $his 9foreseeability test "as0 ho"e'er0 re5ectedin *aparo0 "here Lord ride stated that:<

oolf . held that auditors o"ed the plainti+s aduty of care in the preparation of accounts. e

relied on both nn#s case and $cott %rou& 'tdv. McFarlane in reachin the conclusion thatthe duty could be deri'ed fro# foreseeabilityalone.

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Eor the reasons already indicated0 / donot aree "ith this. /t #ay "ell be0

ho"e'er0 that the particular facts inthe 6 care "ere suFcient toestablish a basis on "hich thenecessary inredient of proi#ity tofound a duty of care could be deri'edfro# the actual ,no"lede on the partof the auditors of the speci%c purpose

for "hich the plainti+s intended to usethe accounts.

Accordin to Lord ride in the sa#e

case0 the three criteria for the

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1. Eoreseeability of da#ae=

2. &roi#ity of relationship= and

>. here the court considers it fair0 5ust andreasonable that the la" should i#pose aduty of a i'en scope on the one partyfor the bene%t of the other.

•. efore the accounts are %nalised0 it isusual for accountants to prepare draftaccounts.

. James McNaughton Paper Group Ltdv. Hicks Anderson & Co.

•. $he 6nlish *ourt of Appeal held thataccountants "ere not liable for

#isstate#ent in the draft account.

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Standard of care

• /t is no part of an auditors duty to i'e

ad'ice on the %nance or internal#anae#ent of a co#pany.

• is business is to ascertain and state thetrue %nancial position of the co#pany at

the ti#e of the audit by ea#inin theboo, of the co#pany.

Re London and General ank !No."#

•

Lindley L.. stated an auditor does notdischare his duty by doin this "ithouten3uiry and "ithout ta,in any trouble tosee that the boo,s the#sel'es sho" the

co#panys true position:<

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• e #ust ta,e reasonable care to ascertainthat they do so. nless he does this0 hisaudit "ould be "orse than an idle farce.

• Assu#in the boo,s to be so ,ept as tosho" the true position of a co#pany0 theauditor has to fra#e a balance sheetsho"in that position accordin to theboo,s and to certify that the balance sheetpresented is correct in that sense.

• ut his duty is to ea#ine the boo,s0 not

#erely for the purpose of ascertainin "hatthey do sho"0 but also for the purpose ofsatisfyin hi#self that they sho" the true%nancial position of the co#pany.

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•  $he duty of an auditor to eercisereasonable care and s,ill can be found int"o classic state#ent.

Re London and General an,

• Lindley L.. stated that:<

 "hat is reasonable care in any particular

case #ust depend upon thecircu#stances of that case. here thereis nothin to ecite suspicion0 'ey littlein3uiry "ill be reasonably suFcient0 andin practice / belie'e business#en selecta fe" cases at haphaBard0 see that theyare riht0 and assu#e that others li,e

the# are correct also.

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 "here suspicion is aroused0 #orecare is ob'iously necessary= but0 still0

an auditor is not bound to eercise#ore than reasonable care and s,ill0e'en in a case of suspicion0 and he isperfectly 5usti%ed in actin on theopinion of an epert "here special,no"lede is re3uired.

Re Hinston *otton ?ill *o (o. 2)

• Lopes L. epressed the 'ie" that:<

/t is the duty of an auditor to brin tobear on the "or, he has to erfor#

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- and caution "hich a reasonablyco#petent0 careful0 and cautious

auditor "ould use. hat is reasonables,ill0 care and caution #ust depend onthe particular circu#stances of eachcase.

An auditor is not bound to be adetecti'e0 or as "as said to approachhis "or, "ith suspicion or "ith

foreone conclusion that there isso#ethin "ron.

e is a "atchdo0 but not a blood

hound. e is 5usti%ed in belie'in

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 he is entitled to assu#e that they arehonest and to rely upon theirrepresentations0 pro'ided he ta,es

reasonable care./f there is anythin calculated to ecite

suspicion he should probe it to the botto#=but in the absence of anythin of that ,indhe is only bound to be reasonably cautiousand careful.

/n the sa#e case0 Lopes L.. Said that:

/ protest ho"e'er0 aainst the notion that anauditor is bound to be suspicious asdistinuished fro# reasonably careful. $osubstitute the one epression for the other

#ay easily lead to serious error.

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Re $ho#as Gerrard and Son Ltd

•  $he learned 5ude dis#issed as bad in la" that

the auditors ouht to be ecused for theirnelience if the directors had not i'en the#enouh ti#e to #a,e a proper audit.

• /n such a case0 the auditors either refuse to

report or #a,e an appropriately 3uali%ed report.•  $he onus is on the auditor to establish that the

da#ae is not the result of any breach of dutyon his part.

• /n deter#inin "hether there has been a breachof the duty of reasonable s,ill and care by anauditor0 the court #ust ha'e reard to theo'erall bac,round and circu#stances in "hich

the alleed breach occurred.