LEGAL POSITION AND LIABILITY OF AUDITORS

1.0 INTRODUCTION

The law has relevance for auditors, especially, with regard to their rights, obligations and liabilities. In this unit, you shall be looking at the effects on auditors of the Companies and Allied Matters Act of 1990, the provisions in the Act establishing the relevant accountancy bodies (especially the Institute of Chartered Accountants of Nigeria), and the stipulations of other branches of the law by considering the following:

1. appointment of auditors 
2. remuneration of the auditors 
3. resolutions as to appointment and removal of auditors 
4. disqualification as auditors 
5. auditors’ reports 
6. rights of auditors 
7. obligations of auditors 
8. auditors’ liabilities. 

 OBJECTIVES

At the end of this unit, you should be able to:

1. explain the provisions of CAMA, 1990 regarding the 
2. appointment and remuneration of auditors 
3. explain the procedure in respect of resolution to appoint and remove auditors 
4. mention categories of persons that cannot qualify as auditors 
5. enumerate the essential elements of the auditors’ reports 
6. highlight the rights and obligations of auditors 
7. explain auditors’ liabilities and enumerate ways they can be minimised. 

3.0 MAIN CONTENT

3.1 Appointment of Auditors

CAMA (1990) provides that auditors should be appointed to protect the shareholders and members of the public by reporting the financial statements of every limited liability company in a fair manner.
Specifically, Section 357 of CAMA (1990) stipulates as follows.

1.  Every company shall at each Annual General Meeting (AGM) appoint an auditor or auditors to hold office from the conclusion of that, till the conclusion of the next AGM; 
2. At any AGM, a retired auditor, however appointed, shall be re- appointed without any resolution being passed unless: (a) he is not qualified for re-appointment; (b) a resolution has been passed at that meeting appointing another person instead of him or providing expressly that he shall not be re-appointed; (c) he has given the company notice, in writing, of his intention to resign or unwillingness to be re-appointed. Provided that where notice is given of an intended resolution to appoint someone in place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of those persons, as the case may be, the resolution cannot be proceeded with, the retiring auditor shall not be automatically re-appointed by virtue of this sub- section. 
3.  Where at an AGM, no auditor or auditors are appointed or re- appointed, the commission may direct the registrar to appoint a person to fill the vacancy; 
4. The company shall within one week of the power of the registrar under sub-section 3 of this section becoming exercisable, give notice as required by this section, the company and every officer of the company who are in default shall be liable to a fine of ten naira for every day during which the default continues; 
5. Subject as hereafter provided, the first auditors of a company may be appointed by the directors at any time before the first AGM,and auditors so appointed shall hold office until the conclusion of that meeting provided that: 
6.  the company may at a general meeting remove such auditors and appoint in their place other persons who have been nominated for appointment by any member of the company and of whose nomination notice has been given to the members of the company not less than 14 days before the date of the meeting; and 
7.  if the directors fail to exercise their powers under this sub- section, the company in a general meeting may appoint the first auditors, and thereupon the said powers of the directors shall cease. 
8.  The directors may fill any casual vacancy in the office of the auditors, but while any such vacancy continues, the surviving or continuing auditors, if any, may act. It can be summarised by stating that the appointment of an auditor may be done by the audit committee made from the shareholders or directors at the AGM. 

3.2 Remuneration of the Auditors

Section 361 of CAMA (1990) states that:
The remuneration of the auditors of a company in the case of an auditor appointed
by the directors or by the registrar, fees may be fixed by the directors or by the registrar as the case may be….. You should note here that the auditors are paid by whoever appointed them. This is subject to negotiation between the auditors and those that appointed them.

 Resolutions as to Appointment and Removal of Auditors

Section 362 of CAMA (1990), deals with this issue. It states as follows.

1.  A special notice shall be required for a resolution at a company’s AGM appointing as auditor a person other than a retiring auditor;
2.  On the receipt of notice of such an intended resolution as aforesaid, the company shall forthwith send a copy thereof to the retiring auditor (if any); 
3. Where notice is given for such an intended resolution as aforesaid and the retiring auditor makes representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company with respect to the intended resolution, the company shall unless the representations are received by it too late for it to do so: 

(a) in any notice of the resolution given to members of the company to state the fact of the representations;
(b) send a copy of the representations to every member of the board to whom notice of meeting is sent.

3.4 Disqualification as Auditors

The Institute of Chartered Accountants of Nigeria Act (1965) provides that none of the following persons shall be qualified for appointment as auditors:

1.  an officer or servant of the company; 
2. a person who is a partner of or in the employment of any officer or servant of the company; 
3.  a body corporate (limited liability company); 
4.  a non-member of the Institute. 

In the application of the above, the disqualification shall extend and apply to persons, who in respect of any period of an audit, were in the employment of the company or were otherwise connected therewith in any manner.

SELF-ASSESSMENT EXERCISE 1

1.  Highlight the procedure relating to the resolution to appoint and remove auditors. 
2. Who pays auditors’ remuneration? 

3.5 Auditors’ Reports

Auditors are required to make a report to the members on the financial statements examined by them. The reports should be laid before the company at the AGM during their tenure of office, and the reports shall contain statements as to the true and fair view of the accounts. The auditors’ reports shall be read aloud before the company’s board of directors in the general meeting and every member is entitled to be given a copy of the reports.

3.6 Rights of Auditors

Under CAMA (1990), every auditor of a company shall:

1. have a right of access, at all times, to the books and all relevant materials of the company; 
2.  be entitled to require from the officers of the company such information and explanation as he thinks necessary for the performance of his duties; 
3. have a right to report on the accounts; 
4. be entitled to attend any AGM of the company and to receive all notices of and other communications relating to any general meeting which any member of the company is entitled to receive; 
5.  have the right to be heard at any general meeting which he attends on any part of the business of the meeting which concerns him as auditor. 

3.7 Obligations of Auditors

Auditors are obliged to:

1.  conduct the audit in accordance with their letters of engagement; (b) do their work honestly and carefully, and with competence; (c) endeavour to access every information relevant to the conduct of audit; 
2.  report on the audit – unqualified or qualified or otherwise; (e) express opinion as to the truth and fairness of the financial statements. 

3.8 Auditors’ Liabilities

Auditors perform audits and sign audit reports. These reports are the auditors’ opinions on the truth and fairness, etc. of the financial statements. Auditors are known to be competent and honest. So, if the auditors opine that the financial statements show a true and fair view, of the financial statements will have faith in them because they have faith in the auditors.
Therefore, the auditor has a responsibility to do his work honestly and with reasonable care and skill as his work is relied upon by others. At this point, we have to note that:

1.  an auditor may fail to exercise sufficient skill and care; 
2. consequently, some fraud or error may be undiscovered, or he may fail to discover that the accounts fail to show a true and fair view, or may contain a material misstatement; 
3.  as a result, somebody who relies on the work of the auditor may lose money; 
4. this loss of money flows from the failure of the auditor to do his job properly; 
5.  the auditor may have to make good from his own resources the loss suffered by another person, that is, to pay damages which flow from his negligence. 

3.8.1 Minimising Liabilities

Auditors can minimise their potential liability for professional negligence in several ways, which include the followings.

1.  Not being negligent; 
2.  Following the precepts of the auditing standards; 
3.  Agreeing the duties and responsibilities in the engagement letter (Engagement letter should specify the specific tasks to be undertaken and exclude specifically, those that are not to be taken. It should also define the responsibilities to be undertaken by the client and specify any limitations on the work to be undertaken). 
4. Defining in their report the precise work undertaken, the work not undertaken, and any limitations to the work. This is so that any third party will have knowledge of the responsibility accepted by the auditor for the work done; 
5.  Stating in the engagement letter the purpose for which the report has been prepared and that the client may not use it for any other purpose; 
6.  By stating in any report the purpose of the report and that it may not be relied on for any other purpose; 
7.  By identifying the authorised recipients of report in the engagement letter and in the report; 
8. By defining the scope of professional competence to include only matters within the auditors’ competence. Do not take on work you are not proficient in. 

SELF-ASSESSMENT EXERCISE 2

Identify the rights of auditors.

4.0 CONCLUSION

In this unit, you have seen that the law has relevance for the auditors. As an auditor, you should be conversant with all the relevant laws guiding the professional conduct of audit work.