LAW485

OFFICERS OF THE COMPANY-

AUDITOR
WAN MARDIANA WAN MUSA
FAKULTI UNDANG-UNDANG
UiTM CAWANGAN TERENGGANU
INTRODUCTION
 Every company must have their accounts audited and thus must appoint at least
one auditor to audit its accounts.
 The auditor must be an independent third party, i.e. an external auditor.
Function: to carry out and present a reliable and independents report on the
accounts and financial position of the company.
An auditors’ report contains a professional opinion, omission or fraud in the
accounts. An auditor’s job includes detecting any material error, omission or fraud
in the accounts.
INTRODUCTION
 The audit’s reliability depends very much on the “independence” of the auditor.
For this reason, the provisions of the Act dealing with appointment and removal
of auditors are designed to ensure that the auditors retain a measure of
independence.
The Act is especially careful to provide that a change of auditors will be
accompanied with some publicity, thereby precluding the possibility of quietly
removing the auditors to cover up misdeeds.
 Beside being independent, the competency of an auditor is also very significant
in carrying out his duties.
QUALIFICATION OF AN AUDITOR
Section 263 CA 2106

• Approval of an auditor is granted by the Minister of Finance if

he satisfied that the person is of good character and competent.

Section 263(7) CA 2016

• “Person” as a chartered accountant is defined under Accountants

Act 1967. Thus, he must be registered with the Malaysian
Institute of Accountants
APPOINTMENT OF AN AUDITOR
 Appointment of auditor must be in writing, and with his consent. This is
provided under Section 264(5) CA 2016.
 Where the auditor is a firm, the consent must be signed in the firm’s name and
by a member of the firm who is an approved company auditor in his own name.
 Section 264(6) CA 2016 provides that the appointment of the firm means that all
persons who are partners of the firm at the date of the appointment are
appointed as the company’s auditors.
APPOINTMENT OF AN AUDITOR
 The following may be appointed as auditor for a company:

An individual who is a registered company auditor

A partnership firm

A limited liability partnership (LLP)

DISQUALIFICATION OF AN AUDITOR
 Section
264(1) CA 2016 provides for conditions to be an auditor, thus who falls
under the following categories is disqualified to be an auditor:
An individual who owes more than RM2500 to the company or a related nody
corporate of the company

An officer or the spouse of an officer of the company

A partner, employee or an employer of an officer of the company

DISQUALIFICATION OF AN AUDITOR
 Section
264(1) CA 2016 provides for conditions to be an auditor, thus who falls
under the following categories is disqualified to be an auditor:
A partner or employee of an employee of an officer of the company

An shareholder or spouse of a shareholder of a corporation whose employee is an

officer of the company

A person who is responsible for or if he is the partner, employer or employee of a

person responsible for the keeping of the register of members or the register of
holders of debentures of the company
DISQUALIFICATION OF AN AUDITOR
 Section
264(1) CA 2016 provides for conditions to be an auditor, thus who falls
under the following categories is disqualified to be an auditor:

An undischarged bankrupt within or outside Malaysia and has not

obtained leave of court

A person who has been convicted of an offence involving fraud or

dishonesty punishable with an imprisonment for 3 months or more.
APPOINTMENT OF AUDITOR IN
PRIVATE COMPANY
 Section 267(1) CA 2016 provides that every private company must appoint an auditor for each
financial year.
 However, the Registrar has the discretion to give exemption. The categories of private company
that are eligible for exemption are dormant, zero revenue and threshold private company. – See
Practice Directive No 3/2017
 The first auditor of a newly established private company is appointed by the board of directors.
See Section 267(3)(a) CA 2016.
 The period of appointing auditor is at least 30 days before the end of the period for the
company to submit its first financial statement to the Registrar. See Section 267(3) CA 2016.
 For the subsequent years, Section 267(4)(a) CA 2016 provides that the members shall appoint the
auditors and this must be done during the period for appointing auditors.
APPOINTMENT OF AUDITOR IN
PUBLIC COMPANY
 For public company, the appointment of the first auditor must be done before
the company’s first AGM. See Section 271(1) & (2) CA 2016.
 Section 271(2) CA 2016 provides that the first auditor is appointed by the board
of directors, who shall hold office until the conclusion of the company’s first
AGM.
 For the subsequent year, the members shall appoint an auditor by ordinary
resolution at the AGM: Section 271(4)(a) CA 2016.
 There is no provision on automatic re-appointment of auditor. So, the
appointment is done on yearly basis.
RESIGNATION OF AUDITOR
 An auditor may resign by giving a notice of resignation and his resignation is
effective within 21 days after the notice is given or from the date specified in the
notice. See Section 281 CA 2016.
 Section 282 CA 2016 provides that when the auditor resign, the company must
submit a copy of his resignation to the Registrar within 7 days of receiving the
notice.
REMOVAL OF AUDITOR
 An auditor may removed by the members at any time before his term expires by
an ordinary resolution at a general meeting. See Section 276 & 277 CA 2016.
 Members who want to remove the auditor are required to serve a special notice
or notice of intention on the company at least 28 days before the scheduled
members’ meeting. The company shall send a copy of the notice to the auditor.
 At the members’ meeting, the auditor shall be entitled to have his representation
read out as well as speak to the members. Then, the resolution to remove the
auditor will be put to vote. After an auditor is removed, the company must notify
the ROC.
REMOVAL OF AUDITOR
 The Companies Act 2016 does not provide for disclosure of reasons for
removal.
 However, appropriate disclosure is required in case of public listed company
with regard to changes regarding its auditor. This includes reasons for the
cessation of the auditor.
DUTIES OF AUDITOR
Common
Law
Statutory Duty to report to members duties Duty to carry out an audit
duties

Duty to report to
Duty to attend meetings members

Duty to be independent

Duty to use reasonable care and

skills
DUTIES OF AUDITOR
 Duty to report to members
 The auditor is required to report to the members of the company’s annual
accounts. Where the company is a public company, the audited accounts must be
laid before the company in its AGM, and where the company is a private
company; the accounts will either be circulated to its members or laid before the
company at its members’ meeting. See Section 266(1) CA 2016.
DUTIES OF AUDITOR
 Duty to report to members
 Under the common law, an auditor is appointed to safeguard the interest of
members. He must provide a report which is circulated among the members. If
fraud is uncovered or suspected, an auditor is under a duty to report promptly the
matters to the directors or appropriate management rather than wait until the
AGM.
 Case: WA Chip & Pulp Co. Ltd v Arthur Young & Co. (1987)
An auditor will breach his duty if, having detected a possible irregular not
amounting to a suspicion of fraud, fails to investigate further and report the matter.
DUTIES OF AUDITOR
 Duty to attend meeting
The auditor of a public company is required to attend every AGM. This is because the
company’s audited financial statements are tabled at the AGM. The auditor could then
respond to the members’ queries on the audit of the financial statements.
A private company is not required to hold an AGM. However, the company may, if it so
wishes holds a members meeting where its financial statements are laid. An auditor who
is given due notice is required to attend the meeting to respond to the members’ queries
which are relevant to the audit to the financial statements.
See Section 285(1) CA 2016.
DUTIES OF AUDITOR
 Duty to carry out an audit
 Under the common law, before an auditor can form an opinion whether the
company’s accounts provide a true and fair view of its position, an audit must be
carried out. In carrying out an audit, particularly where the company’s account is
complex, an auditor is required to devise procedures to assist in the detection of
errors or fraud.
 Case: Pacific Acceptance Corp Ltd v Forsyth (1970)
In this case, Moffit J states: “An auditor pays due regard to the possibility of fraud
or error by framing and carrying out his procedures…”
DUTIES OF AUDITOR
 Duty to be independent
 Besides that, an auditor must be independent. The purpose is to ensure that the shareholder
receive an unbiased opinion of the true and fair view of the company’s position.
Case: Re Transplanters (Holding Co) Ltd (1958)
In this case, Wynn Parry J states that, “Once a man takes upon himself a position of auditor… he
must stand aloof and divorce from the aims, objects and activities of the company”.
This doesn’t mean that an auditor must sever all other connections with the company. Auditors
are entitled to seek assistance from the company’s director, accountants and other employees in
carrying out their functions. However, auditors will be breach of their duty if they rely on them
for information on which they are required to form their own independent judgement or opinion.
DUTIES OF AUDITOR
 Duty to be independent
 Case: Dominion Freeholders Ltd v Aird (1966)
This case involved an auditor prepared an erroneous report. The company brought an
action against him for breach of his contractual duty of care and he sought to join the
company’s accountant as company defendant on the basis that the accountant had supplied
him with incorrect information and was in breach of duty owed to him.
The court held that the application by the auditor was rejected. Auditors must not rely or
depend on company’s officers for information or representation in respect of matters
upon which they do so rely; they cannot shed their responsibility by casting the liability on
the company’s officer.
DUTIES OF AUDITOR
 Duty to use reasonable care and skills
 Another important aspect of being an auditor is, he must use reasonable care
and skill in carrying out the audit and in forming an opinion on the company’s
account. Failure to do this renders an auditor liable to the company in damages
for breach of contract.
An auditor may also be liable in negligence. An auditor who uses less than the
required degree of care and skill is liable to the company for any loss suffered as a
result.
DUTIES OF AUDITOR
 Duty to use reasonable care and skills
 Case: Re Kingston Mill & Co (No2) (1896)
The auditors failed to detect fraud done by the managing director. They relied on false
certificates supplied by him as to the value of stock. The audited accounts indicated that
profits had been made and consequently dividends were paid. Had the value of stock been
properly determined, there would have been no profit from which dividends could be paid.
An action was brought against the auditors seeking to recover the loss caused by the
wrongful payment of dividends.
Held: The auditors were not in breach of duty because standard of care did not require
them to take stock. They were entitled to rely on the manager’s certificates as they were no
grounds for suspicion and the manager was widely regarded as a man of good character
and trustworthy.
DUTIES OF AUDITOR
 Duty to use reasonable care and skills
 Case: Re Kingston Mill & Co (No2) (1896)
The auditors failed to detect fraud done by the managing director. They relied on false
certificates supplied by him as to the value of stock. The audited accounts indicated that
profits had been made and consequently dividends were paid. Had the value of stock been
properly determined, there would have been no profit from which dividends could be paid.
An action was brought against the auditors seeking to recover the loss caused by the
wrongful payment of dividends.
Held: The auditors were not in breach of duty because standard of care did not require
them to take stock. They were entitled to rely on the manager’s certificates as they were no
grounds for suspicion and the manager was widely regarded as a man of good character
and trustworthy.
DUTIES OF AUDITOR
 Duty to use reasonable care and skills
 Case: Re Thomas Gerrard & Sons Ltd. (1968)
The managing director had over the period of years been making obvious alterations to
invoices receives from suppliers. Whilst some of these invoices had come to attention of
the auditors, they nevertheless relied on the stocktaking procedures set up by the managing
director without investigating the matter any further. Soon, after discovery of the true
situation, the company went into liquidation. The liquidator brought an action against the
auditors.
Held: The auditors were liable to the company because once altered invoices had been
discovered, the auditors were put on inquiry and it was insufficient that they merely sought
assurances from the managing director and they should have informed the board. The
auditors had therefore failed to exercise reasonable care and skill.
DUTIES OF AUDITOR
 Duty to use reasonable care and skills
 Case: Pacific Acceptance Corp. Ltd v Forsyth (1970)
The auditors left the audit with several clerks. Irregularities were detected on
several occasions by different audit clerks. These matters were not followed up.
Held: The auditors were held to be negligent in employing inexperienced staffs
who were not properly supervised.
DUTIES OF AUDITOR
 Basically, an auditor owed duty towards the company that relies on their reports.
 Case: Scott Group Ltd v McFarlane (1978)
In this case, the court held that the reason why auditors should be made liable to person
who rely on their reports:
1. Auditors are professional who provide expert advice
2. Auditors should reasonably expect their report would be used by other persons apart
from the company
3. It is reasonable for an outsider to rely on the reports as they might not have the time
or knowledge to examine the company’s accounts themselves
4. Auditors reports are publicly available
DUTIES OF AUDITOR
 Question may arise as to whether an auditor owes duty towards individual
shareholders or directors of the company as well as the third party?
 In Ng Wu Hong v Abraham Verghese Tv Abraham & Ors [2011] 6 CLJ 322, the
court held that an auditor does not owe duty towards the director of the
company. Referring to the previous 1965 Act, the role of an external auditor is to
provide an independent report to the shareholders about the performance of the
company, not the individual director.
DUTIES OF AUDITOR
 Under common law, an auditor does not owe duty of care towards a third party
in relation to the statutory audit.
 Case: Caparo Industries PLC v Dickman (1990)
Caparo, a shareholder of Fidelity PLC, who received an audited account purchased
more shares and later made a successful takeover bid. After the takeover, Caparo
brought an action against the auditors of the company on the grounds that the
profits were overstated. In fact, the company was at loss.
The court held that auditors owed no duty to potential investors who seek to base
their investment decision on the audited accounts whether they are existing
shareholders or not.
DUTIES OF AUDITOR
 A clearer stand made by the court in the case of Al Saudi Banque v Clarke Pixley
(1990)
In this case, the court held that mere foreseeability in terms of reliance on the
auditors’ report was inadequate to establish a duty of care.
Therefore, to make an auditor liable to third party, he must prove;
1. Foreseeability
2. Proximity
3. Justice for each case
DUTIES OF AUDITOR
 The concept of proximity is introduced by Lord Denning LJ in the case of
Hedley Byrne v Heller (1964)
“An auditor being a professional is a subject to extra-contractual responsibilities to
those parties who can demonstrate that they were owed a duty of care by the
auditor.”
This case introduced a concept of proximity in that liability could arise where a
special relationship exist between the party making the negligent statement and
the party to whom he was made. Such a relationship would exist if the party
giving the advice had known or to have known that the inquirer was relying on
them.
DUTIES OF AUDITOR
 An auditor also does not owe duty towards the creditors of the company.
 Case: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] 23 ACSR
71
Esanda, a finance company lent money to a group of companies after reviewing its
audited accounts. The borrower was unable to meet its commitments and Esanda
sued Peat Marwick alleging that they had been negligent in conducting the audit
and that negligence had caused Esanda’s loss. Peat Marwick denied that it owed
duty of care to Esanda.
The court held that Peat Marwick did not owe duty of care to Esanda based on
consideration of proximity.
LIABILITY OF AUDITOR
 In order to render an auditor liable in damages, it is not sufficient to establish
merely that he was negligent in carrying out the audit. It must further be proved
that the damage caused was a result of negligence. The general legal principle of
causation is also relevant professional negligence cases involving auditors.
 Case: Ikumene Singapore Pte Ltd & Anor v Leong Chee Leng [1993] 3 SLR 24
Held: the appellant had not proved that their losses were due to the respondent
auditor’s negligence and accordingly, the appellant’s claim was dismissed. In this
case, Ikumene’s trading loss was not caused by the auditor’s failure to qualify the
accounts.
LIABILITY OF AUDITOR
 Case: Cambridge Credit Corp Ltd v Hutcheson (1985)
Held: although the audit was carried out negligently, this was not the cause of the
loss to the company. The court found that the real cause of the loss was the
dramatic downturn in the economy at the time.
 Case: Lloyd Cheyham & Co Ltd v Littlejohn & Co (1987)
Auditors can escape from liability of negligence by showing that they have acted in
accordance with a practice accepted as proper by a body of responsible and skilled
professional opinion.
THE END
ANY QUESTIONS?