We have recently read in the newspapers of claims directed at the auditors of certain companies and/or the services provided by certain departments of audit firms and the intention by parties to hold such auditors responsible for certain company failures or certain reports issued by said firms.
When something goes wrong the auditors of companies are usually in the firing line. Sometimes I would like to pose a question to such claimants and ask them what they did to ensure that their investment is safe or to ensure that the investigation that lead to the report in question never should have happened in the first place. It is very easy to direct blame to the auditors when something goes wrong.
Let’s look at the responsibilities of auditors, in broad and layman’s terms. The Institute of Chartered Accountants and the Public Accountants and Auditors Board will have a more comprehensive and technical description of these duties, but we will try and simplify these in this piece. We will focus our attention on private limited companies since listed companies have various additional requirements in this regard.
In accordance with the Companies Act, Act 28 of 2004, the auditor of a company must report to the members, shareholders, of the company on the matters that it investigated and the auditor has the right to inspect any documentation and accounting records of the company in order to do so. The report is therefore issued to the shareholders and not to the directors of the company. The auditor must ensure that the annual financial statements of the company comply with the requirements set out in the Companies Act, Act 28 of 2004.
Section 308 and Section 309 of the Companies Act, Act 24 of 2008, states as follows:
“Duties of auditor as to annual financial statements and other matters
308. It is the duty of the auditor of a company –
(a) to examine the annual financial statements and group annual financial statements to be presented before its annual general meeting;
(b) to satisfy himself or herself that proper accounting records, as required by this Act have been kept by the company and that proper returns adequate for the purposes of his or her audit have been received from branches not visited by him or her;
(c) to satisfy himself or herself that the minute books and attendance registers in respect of meetings of the company and of directors and managers have been kept in proper form as required by this Act;
(d) to satisfy himself or herself that a register of interests in contracts as required by section 248 has been kept and that the entries are in accord with the minutes of directors’ meetings;
(e) to examine or satisfy himself or herself as to the existence of any securities of the company;
(f) to obtain all the information and explanations which to the best of his or her knowledge and belief are necessary for the purposes of carrying out his or her duties;
(g) to satisfy himself or herself that the company’s annual financial statements are in agreement with its accounting records and returns;
308. It is the duty of the auditor of a company – (continued)
(h) to examine group annual financial statements and satisfy himself or herself that they comply with the requirements of this Act;
(i) to examine the accounting records of the company and carry out tests in respect of those records and other auditing procedures which he or she considers necessary in order to satisfy himself or herself that the annual financial statements or group annual financial statements fairly present the financial position of the company or of the company and its subsidiaries and the results of its operations and those of its subsidiaries, in conformity with generally accepted accounting practice applied on a basis consistent with that of the preceding year;
(j) to satisfy himself or herself that statements made by the directors in their reports do not conflict with a fair interpretation or distort the meaning of the annual financial statements and accompanying notes;
(k) when he or she gets to know that the company is not carrying on business or is not in operation and has no intention of resuming operations in the foreseeable future, to report forthwith accordingly by certified post to the Registrar;
(l) to comply with any other duty imposed on him or her by this Act; and
(m) to comply with any applicable requirements of the Public Accountants’ and Auditors’ Act, 1951 (Act No. 51 of 1951).
Report of auditor 309.
(1) When the auditor of a company has complied with the requirements of, and has satisfied himself or herself as to the matters stated in, section 308, and has carried out the audit free from any restrictions whatsoever, the auditor must make a report to the members of the company to the effect that he or she has examined the annual financial statements and group annual financial statements and that in his or her opinion they fairly present the financial position of the company and its subsidiaries and the results of its operations and that of its subsidiaries in the manner required by this Act.
(2) If the auditor is unable to make the report referred to in subsection (1) or to make it without qualification, the auditor must include in his or her report a statement to that effect and set out the facts or circumstances which prevent him or her from so making his or her report or from making it without qualification.
(3) The auditor’s report under subsection (1) must, unless all the members present agree to the contrary, be read out at the annual general meeting.”
It is important to note the details quoted above from the Companies Act. These requirements state that the auditor must express an opinion on these matters and indicate if the financial statements “fairly present” the company’s results. It does not require the auditor to state that the financial statements are “correct”. If that was the requirement then auditors had to test every single transaction that took place and that is impossible.
The auditors also test the transactions and financial affairs of a company after the year-end of the company. That means that if fraud took place during the year under review or if the company went into liquidation during the current year under review, the auditors have not yet performed their duties and it remains the responsibility of the directors and management of the company to protect the company against such matters, as far as possible.
The auditors are also not responsible for the controls and procedures of a company, the directors and management of the company are and they can only report on such matters to the shareholders. The auditor’s report is not an absolute safety net for the shareholders or stakeholders of a company. The auditor’s functions are specific and not all comprising, since that is not possible.
It is therefore the responsibility of the directors, management, staff and stakeholders as a combined unit to ensure that a company can continue doing business or that a company is safeguarded against things like fraud. The auditors are part of this collective responsibility, but does not have the exclusive responsibility as some might think or believe.