*Company Administration, Accounts and AuditCorporate LawWan Wai Yee Associate ProfessorWeek 6

*IntroductionAccounts and AuditImportant - Requirements of accounts and the role of auditors are set out in Part VI, Companies Act. See reading list.For the seminar in class, we are focusing on civil liabilities of companies, their directors and auditors for inaccuracy of the accounts

*Annual AccountsAnnual reporting Who reads the accounts:Shareholders of the company (to assess if the companys management is doing its job)Creditors of the company (since claims are confined to the companys assets)If company is listed:equity investors (not only shareholders but also those that are contemplating investing equity in the company)debt investors (those planning to purchase or sell debt securities issued by the company)

*Annual AccountsAccounting records: All companies are required to maintain accounting records so that accounts can be prepared (s 199 CA) Must all accounts be audited?For exempt private companiesNo (if revenue does not exceed prescribed amount, which is currently $5 million) (s 205C CA)For other private companies YesFor dormant companies No (s 205B CA)For public companiesYes NB: No change since recommendation not accepted

*Annual AccountsForm and content of annual accounts:Compliance with Financial Reporting Standards (laid down by the Accounting Standards Council)Balance sheet and profit and loss accounts must give a true and fair view of the state of affairs of the individual company or of the companies included in the consolidation for group accountsIf compliance with the FRS would put accounts in breach of the true and fair requirement, directors must depart from the FRS to give a true and fair view; in such a case, statement of auditors is necessaryOther components of accounts e.g. cash flow statement, statement of changes in equity will be included

*Annual AccountsDirectors report:Accompany the individual and group accountsCompanies Act requires the directors report to report on the profit and loss of the company (or group) and state of its affairs as at the end of the FY, and directors statement stating whether the profit and loss account and balance sheet present a true and fair view of the business and financial state of the company (group) and whether there are grounds to believe that the company will pay its debts as they fall dueListing Manual requires annual report containing audited accounts, narrative disclosures including a discussion on the companys operating and financial performance and business outlook Proposal to abolish directors report and put info within accounts; no business review

*Annual Accounts

Civil liability for misstatements in accountsCompanies Act does not deal with the issue on civil liabilityDistinguish liability of directors to company and liability of companies/directors to third parties

Liability of directors to companyCommon law liability of directors to company may arise under breach of fiduciary duties or deceit or negligence

*Annual Accounts

Civil liability of companies/directors to third partiesEntirely under common law and under the Securities and Futures Act Common law - tort of deceit or tort of negligenceCaparo v Dickman dealt with liability of auditors in negligence to investorsBut test for duty of care and conclusion are relevant to govern issue relating to duty of care owed by companies and/or directors to investors

DeceitProblems in establishing the tort of deceit

*Annual Accounts

Negligence

Caparo v DickmanConsider the factsConsider the exception in which companies and directors may continue to be liable

Statutory causes of action under s 199 or 200 of the SFA (important for listed companies) COMPLICATEDNot a meaningful claim for civil liability cap on damages that can be awarded.What is the mental element required to be proved?What is the extent of recovery?

*Auditors

Auditors are appointed by the members of the company at the AGM: s 205. In practice, the board nominates the auditors and the approval is given by the members. Auditors hold office until the conclusion of the AGM but may be removed beforehand: s 205. Auditors are required to report on the accounts to the members: s 207. Auditors are required to report serious offences involving fraud or dishonesty committed against the company.

*Auditors

Role is to provide opinion (s 207):

*Auditors

*AuditorsAuditors must be independent because of important function of certifying correctness of companys accounts, detect errors and fraud

*Auditors

What happens if the audited accounts turn out to be inaccurate?Liability to audit client (contract, tort)Note possible contributory negligence defence if auditors are negligent in detecting fraud and management is negligence in supervisionLiability to investors?Tort of negligence?See Caparo v Dickman, adopted locally in IkumeneProbably not affected by Spandeck Engineering

*Auditors

Tort of negligence (contd)Note situations where duty of care may be owed to third partiesIs it possible for auditors to limit liability to the company by means of contract or in the articles? No see s 172 (applies to auditors) In UK Companies Act 2006 - movement is to allow auditor and company to contract to limit the amount of a liability the auditor owes to the company arising from breach of the duty in conduct of audit. Report against such recommendation for now

*Auditors

Audit Committees of the BOARDRequired for listed companies (s 201B)Committee of Board (majority must be independent)Function? s201B

*Auditors

For further reading on the role of Audit Committees of Singapore listed companies, see the Guidebook published by the MAS:http://www.mas.gov.sg/news_room/press_releases/2008/ACGC_submit_its_Guidebook_for_Audit_Committees_in_Singapore.html

Liability of auditors and fraudCan a company sue its own auditors if it suffers loss as a result of fraud on the part of its employee?Are there policy reasons why such an action should or should not be allowed?*

Revision of accountsProposal to allow ACRA to require company to revise accounts where defects are detected. *

*Questions?

Supplemental Companies (Amendment) Bill 2013 (DRAFT)Small company exemption from auditSmall company criteria introduced to determine whether a company is required to be audited. Small companies would be exempted from the statutory requirement for audit. The following are the criteria for determining a small company: (a) the company is a private company; and (b) it fulfils two of the following criteria

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Supplemental Companies (Amendment) Bill 2013 (DRAFT)Auditor of a non-public-interest company (other than a subsidiary of a public interest company) should be allowed to resign upon giving notice to the company. The status quo should be retained for the auditor of a non-public-interest company which is a subsidiary of a public interest company, viz, such a companys auditor may only resign if he is not the sole auditor or at a general meeting, and where a replacement auditor is appointed. Recommendation modified by MOF. The requirement for resignation for an auditor of a non-public-interest company, which is a subsidiary of a public-interest company, is made consistent with that for an auditor of a public-interest company (under Recommendation 4.24).

The auditor of a public-interest company should be required to seek the consent of ACRA before he can resign.

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Exempt private company will be abolished. Instead small company exemption. A small company is a private company and it fulfils two of the following criteria: Total annual revenue not more than S$10 millionTotal gross assets of not more than S$10 millionNot more than 50 employees*Report recommends to include other components of accounts, e.g. cash flow statement, statement of changes in equity*Report abolish the directors report and instead put the information within the accounts. No proposal to have a business review. Signed off by chairman and CEO. Statement by Drs that the financial statements were drawn up to give a true and fair view. As at the date, company can pay debts as they fall due

Auditors Report; will set out what the report is about. Stress the fact that Mgmt responsible for F/S. Auditors responsibility is to express opinion on F/S. Whether the statements are drawn up in accordance with IFRS.*Drs are liable to CompanyBut company did not suffer any loss.

Civil liability largely in relation to the third party.Common law. Potential liability under SFA not significant because of the way SFA is worded. Thus liability under common law becomes significant*Caparo will directors be liable? Will the reasoning apply to directors? Drs were sued at first instance. What is the purpose of preparing the annaul accounts? Drs can exercise class rights (right to vote) in general meeting.. profits are falling, vote in new drs.Purpose of account is to allow to vote in or vote out management. Not for the purpose of investing in the shares. If this was the purpose (vote in or vote out), then directors are not liable and auditors are not liable. No duty of care owed to investors.

As an investor, you quite anxious.... You get the auditor to represent to you directly (hedley byrne 4 limbs) you would have relied on it to your detriment for that particular purpose and the auditors knew that you relied on it thus, need to get another engagement with the auditor. **Duty owed by auditor to the client. K or Tort. Auditors liable to the Company (Audlit client, will have to show loss, but usually no loss of company), and not to Investors.

*Proposal is to move the requirements to SFA*Auditor counter-argument reason for the loss is becase your employee was fraudulent so why should we be responsible?Middle approach: PlanAssure PAC v Gaelic Inns : yes coy can sue auditors but the auditor can raise defence of CN or s391 of the CA which allows for relief on the part of the auditor even if the auditor had been careless, so long as he acted honestly and reasonably.Even if auditor is careless, he can still rely on s391.Suppose the company has a 100% shareholder called Mr X. Mr X (shareholder) siphoned money away from the Coy. Liquidators come in. Mr X cannot be found. Liquidators want to sue someone. Liquidator will sue the auditors. As a result company suffered losses. Will the same logic applies?

Liquidator cannot sue auditors. Moore stephens case. Because of illegality. It would benefit the company. The company was fraudulent (even if Mr X controlled only 20% or whatever). Liquidator sue auditors means that the shareholder X would benefit... **