Balancing the duty to report and the confidentiality obligations, with special reference to the principle of auditor independence in company law

Abstract

Although the company audit is of benefit to a variety of financial report users, it is legally intended for its owners, the shareholders. This can be best demonstrated by referring to the main provisions of company legislation concerned with the appointment, qualifications, removal, resignation and remuneration of the company auditor. However, the shareholders are not the only report user group to be considered with regard to the function of the auditor. In fact, there are numerous persons external to the company who appear to be interested in its financial results. Such persons are known to make use of company financial statements, and for this reason it is only proper that the auditor is seen to have a duty of care towards them, even though this is not spelt out in any particular provision of company legislation. A limited liability towards these 'foreseen' users of financial statements has somehow been recognised by the courts. Apart from this, the auditors' vantage point and their exclusive powers and position as lords of the financial statements place them in a unique position to detect fraud (if this is indeed one of their functions) and to suspect and be in a position to report money laundering (if they have a nose for propriety). The company audit is concerned with the generation of rational belief and confidence in the accounting information contained in the company's annual auditable financial statements. It is conducted specifically on behalf of the shareholders in order that they may use the information in their decision making without doubting its reliability and credibility. Furthermore, because the quality of the information is attested in this way, the audit should also be of benefit to other users of the financial statements such as lenders, creditors, suppliers and employees. The audit is therefore a function which seeks to evidence the propriety of certain accounting statements about the economic performance of the company. It is important that shareholders and other potential users of the financial statements know exactly what is being done by the auditor on their behalf. This should allow them to use the attested information without doubt or suspicion as to its reliability and credibility. When there is a company failure by reason of fraud, the auditors may be sued for all the creditors' losses even if the directors were negligent and the fraudsters prosecuted. In the United Kingdom, some of the big accountancy firms have created fraud investigation or forensic accounting departments manned by professional investigators. Notwithstanding that there is self-regulation and the presence of strict regulators, laws and regulations have been deemed necessary to convert the right to report to the regulator into a duty to report. Thus, the auditors currently report in varying circumstances: to the shareholders, 'foreseen' third parties and the public, to the regulatory authorities [and] to the police. In Malta, the rigours (or lack of them) of the auditing profession are definitely not what they used to be five years ago. Apart from self-regulation which is now firmly established, laws and regulations as well as the code of ethics launched by the Ministry of Finance have shaken a good measure of impropriety off the auditing profession. The problems concerning complicity in 'cooking the books', non-audit fees surpassing audit fees as well as problems relating to the 'noose syndrome' which accompanies excessive reliance on income from large client firms, have not disappeared overnight. However, if some auditors think that the size of the fees makes the conduct better or appropriate, they should think again if they treasure their warrant to practice, for the consequences and the penalties are far greater now.