In a paper entitled Modern Company Law: Completing the Structure, it proposes a ‘balanced approach’ to defining the functions and duties of auditors, and consequently company directors and employees.
Currently auditors’ duty of care applies only to the corporate governance of shareholders.
The proposal would mean prepared audits could then be used as a basis for credit or investment decisions by third parties, and that auditors could be liable if there audits did not accurately reflect the financial position of the company.
It would then follow that this duty of care would extend to company directors and employees involved in preparing audits and would mean that auditors would be able to claim against a company if the director or employee was negligent or fraudulent in preparation of accounts.
The paper suggested that it also be possible for auditors to claim agains company directors and employees in their persoanl capacity, as well as against the company.
The degree of liability of auditors and company directors was a major debating point in the paper, with individuals, businesses and professional accounting bodies expressing different points of view. However, the majority of the responses supported the proposals.
Auditors functions should be extended to include reviewing statutory preliminary announcements such as summary financial statements and the operating and financial review to ensure they comply with statutory regulations, according to the report.
Lastly it called for greater involvement of company directors and employees in the audit process, included allowing former auditors to contribute relevant information.
Taking forward the ideas proposed in Developing the Framework, the paper is the second strategic consultation document issued by the steering group of the Company Law Review, an independent body tasked by the Department of Trade & Industry.
This forms part of the DTI’s long-term fundamental review of core company law launched in March 1998 with the aim of developing a simple, modern, efficient and cost effective framework for carrying out business activity in Britain for the twenty-first century.
The deadline for comments on the paper is 28 February 2001.
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