Company Administration, Accounts and Audit Corporate Law

Wan Wai Yee Associate Professor Week 6

Introduction
Accounts and Audit Important - 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 Accounts
Annual 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 Accounts
Accounting 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 Yes For dormant companies No (s 205B CA) For public companiesYes

NB: No change since recommendation not accepted

Annual Accounts
Form 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 accounts If 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 necessary

Other components of accounts e.g. cash flow statement, statement of changes in equity will be included

Annual Accounts
Directors report: Accompany the individual and group accounts Companies 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 due Listing 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 6 info within accounts; no business review

Annual Accounts
Civil liability for misstatements in accounts Companies Act does not deal with the issue on civil liability Distinguish liability of directors to company and liability of companies/directors to third parties Liability of directors to company Common 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 parties Entirely under common law and under the Securities and Futures Act Common law - tort of deceit or tort of negligence Caparo v Dickman dealt with liability of auditors in negligence to investors But 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

Deceit Problems in establishing the tort of deceit

Annual Accounts
Negligence Caparo v Dickman Consider the facts Consider 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) COMPLICATED Not 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?
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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.

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Auditors
Role is to provide opinion (s 207):

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Auditors

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Auditors

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

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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 supervision

Liability to investors?
Tort of negligence? See Caparo v Dickman, adopted locally in Ikumene Probably not affected by Spandeck Engineering

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Auditors
Tort of negligence (contd) Note situations where duty of care may be owed to third parties Is 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

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

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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_A udit_Committees_in_Singapore.html

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Liability of auditors and fraud

Can 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?

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

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Questions?

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Supplemental Companies (Amendment) Bill 2013 (DRAFT)

Small company exemption from audit Small 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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