Duties of Auditors in Detecting Fraud in Companies
1.
Section 207 of the Companies Act sets out the powers and duties of a company’s
auditors as to reports on accounts. Those duties include a duty to report to the members
on the accounts required to be laid before the company in general meeting and the
company’s accounting and other records relating to those accounts, in sufficient time for
the company to comply with its obligations under section 203(1).
2.
The auditor is required to state in his report, inter alia:
(a)
whether the accounts are in his opinion properly drawn up:
(i)
so as to give a true and fair view of the matters required by section 201
to be dealt with in the accounts; and
(ii)
in accordance with the Companies Act so as in the case of a balancesheet to give a true and fair view of the company’s affairs and in the case
of a profit and loss account to give a true and fair view of the company’s
profit or loss;
(b)
whether the accounting and other records and the registers required by the
Companies Act to be kept by the company have been, in his opinion, properly
kept in accordance with the Companies Act;
(c)
any defect or irregularity in the accounts and any matter not set out in the
accounts without regard to which a true and fair view of the matters dealt with by
the accounts would not be obtained; and
if he is not satisfied as to any matter in paragraphs (a) or (b) above, his reasons for not
being so satisfied (see section 207(2)).
3.
The auditor of a company has a duty to form an opinion as to each of the following
matters:
(a)
whether he has obtained all the information and explanations that he required;
(b)
whether proper accounting and other records, including registers, have been kept
by the company as required by the Companies Act;
(c)
whether the returns received from branch offices of the company are adequate;
(d)
whether the procedures and methods used by a holding company or a subsidiary
in arriving at the amounts taken into any consolidated accounts were appropriate
to the circumstances of the consolidation; and
(e)
where consolidated accounts are prepared otherwise than as one set of
consolidated accounts for the group, whether he agrees with the reasons for
preparing them in the form in which they are prepared, as given by the directors
in the accounts,
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(f)
and he shall state in his report particulars of any deficiency, failure or shortcoming in respect of any matter referred to above (see section 207(3)).
4.
Under section 207, an auditor has a right of access at all times to the accounting and
other records of the company, and is entitled to require from any officer of the company
and any auditor of a related company such information and explanations as he desires
for the purposes of the audit (see section 207(5)).
5.
Auditors have a duty to report certain breaches and non-observances of the Companies
Act to the Registrar and/or the Minister, where the same comes to their notice in the
course of performance of their duties as company auditor (see section 207(9)).
6.
An auditor’s function is to certify the correctness of the company’s accounts, to detect
errors and to detect fraud, the detection of fraud generally being regarded as of primary
importance. This function is discharged by making a report to the members of the
company in accordance with section 207 and, in appropriate cases, by reporting to the
board of the company or the Registrar any irregularities that he has discovered. Where
an auditor discovers irregularities or suspects fraud or dishonesty, he has an obligation to
bring these matters to the attention of the company’s management or directly to
members: Pacific Acceptance Corp v Forsyth (1967) 92 WN (NSW) 29 at 50-54.
7.
Like all professionals, an auditor is obliged to exhibit a reasonable degree of care and
skill and care in the performance of his duties. This duty may arise in contract or in tort.
8.
An auditor’s duty will be owed primarily to the company he is auditing, as that is the
person with whom he has contractual relations, and that is the person most likely to have
an action against the auditor. Most auditors’ negligence cases have been brought by the
company audited for breach of a contractual duty to take care. The terms of an auditor’s
contract may require him to do more than what is prescribed by the Companies Act.
However, in the absence of special terms in the contract, an auditor is bound (at the very
least) to ensure that his statutory duty is discharged with reasonable skill and care.
9.
The comments above deal with the auditor’s duty in respect of the statutory annual audit
report. However, if an auditor is commissioned to provide a report for any other purpose
(such as the issue of a prospectus), the auditor will owe a contractual duty to the person
who commissions the report and may also owe a duty in tort to any person whom they
know or ought to know will rely on their report (on the principle in Hedley Byrne & Co Ltd
v Heller & Partners Ltd [1963] 2 All ER 575). If the auditor’s statutory annual audit report
is used for special purposes, and the auditor knows of such use, there may be liability to
those who rely on the report for such special purposes.
10.
The standard of care against which the company’s auditor would be measured is that of a
reasonable auditor. In order to determine whether, in this case, your auditors acted in
accordance with the appropriate standard, we would in all likelihood need to obtain an
expert report prepared by another accounting firm as to what a reasonable auditor would
have done in the same circumstances.
11.
We note that an auditor may in the normal case rely upon the word of the officers of the
company charged with keeping the company’s records. In the absence of circumstances
that would excite the suspicion of a reasonable auditor, he is entitled to assume that the
servants of the company are honest. In other words, he does not have to verify
everything personally, but may rely on the company’s records and books.
12.
The auditor may also rely on the company’s own system of internal control, provided 3
conditions are met:
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(a)
there is a proper inquiry to ascertain the strengths and weaknesses of the
company’s system;
(b)
a person of sufficient auditing competence should appraise the system to
determine to what extent it may be relied upon; and
(c)
the system should be tested.
13.
Where an auditor discovers irregularities or if there are suspicious circumstances, he is
obliged to probe the matter further and may not merely rely on the officers of the
company.
14.
Even if negligence is established, an auditor will only be responsible for damage to the
company caused by such negligence, such as loss caused by the loss of the opportunity
for the company to correct the failings which ultimately have led to the company’s loss.
15.
An auditor who certifies that a company’s profit and loss account and balance-sheet
reflect a true and fair view of the company’s affairs when he knows otherwise may be
guilty of an offence under section 401(2): James Tan Giap Hong v PP (unreported,
District Court, Singapore, 27 January 1988).
Copyright © 2005 Colin Ng & Partners
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