felix topic 9 accounts audits and investigations set 2

8/10/2019 Felix Topic 9 Accounts Audits and Investigations Set 2

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AF3507: Company Law

Accounts, Audits and

Investigations

Topic 9

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Objectives

Explain the legal requirements of company

accounts

Explain the role, duties and liabilities of

company auditors

Explain the legal rules related to investigation

by Inspectors under CO

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Company Accounts

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The Company Must Keep

Accounting Records

Every company must keep proper books of account (s373)

and those books must:

Show and explain the companys transactions

Disclose with reasonable accuracy, at any time, the companysfinancial position and financial performance; and

Enable the directors to ensure that the financial statements

comply with the Companies Ordinance

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Types of Accounting Records

The Company must keep records of (s373[3]): Daily entries of all sums of money received

Companys assets and liabilities

If directors fail to take all steps to ensure compliance, theycommit an offense with fines of HK$300.000 and possibly

imprisonment for 12 months (s373 [5] and [6])

Any directors (not members) have a right to inspect theaccounting records kept by the company (s 375)

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Directors Must Prepare Annual

Financial Statements (S 379)

The annual financial statements of a financial year must give atrue and fair view of the financial position and financial

performance of the company as at the end of the year (s380[1])

The financial statements must also comply with the rules of the

Companies Ordinance and professional financial standards(s380[4])

Financial records must conform with CO Sch 4.

Consolidated B/S and P&L if the company has subsidiaries

Partial exemption for private Cos (s359-366)

Directors must prepare an Annual Report and submit it to GM

(s388-91)

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Reporting Exemption for Private Firms

A benefit of simplified financial and directors reportapplies to those private firms that qualify for such a

benefit under ss359-366 and schedule 3 of the Companies

Ordinance

Qualified private firms are referred to in the Ordinance as

companies falling with the reporting exception

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Simplified financial reporting

No requirement to disclose the auditors remunerations (s380*3+) No requirement for financial statements to give a true and fair

view (section 380*7+)

No requirements to include business review in the directors

report (s388[3][a]) No requirement for the auditor to express a true and fair view

opinion on the financial statements (s406[1][b])

Financial statements will be prepared under the SME-FRS and

FRF accounting standards which are more lenient than the HKFRSstandard applicable to listed, public or other companies not

qualified for simplified reporting

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Directors Report: Business Review

(s388 and schedule 5)

The directors report must include a section called

business review which provides a more analytical and

forward-looking view of the company

Firms which are not bound to this requirement

Private companies qualified for simplified reporting

Private companies not qualified for simplified reporting can opt

out of business review requirement by SR in GM

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Auditors

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Auditorsrole

Accounts = internal check on finances

Audits = external/independent check on accounts

Audit report is primarily for shareholders

Audit report mightbe relied on by investors, creditors

Everycompany must appoint auditors (s394)

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Auditors - powers

Right of access to all books, accounts and vouchers (s412[1])

Entitled to attend general meetings (s411)

Subsidiaries must provide info/explanations to their holding

companys auditors (s412*4+)

An offense for officer to knowingly/recklessly make a false or

misleading statement to auditor (s413)

Statutory immunity (in contract, tort, defamation or

otherwise) (s410).

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Enhanced Auditors Rights to Information

The auditor can ask for information to among otherpersons (s412):

companys officers;

HK subsidiary of the company;

the officers or auditors of such a subsidiary;

person holding or accountable for any of the accounting records

of the company or subsidiary;

ask a HK holding company to require information from its non-HK

subsidiaries

Failure of these persons to comply with the auditors

requests entail criminal sanctions (s413)

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Auditorsappointment and resignation

First auditorsappointed by directors, until firstAGM (s395)

Subsequent auditorsappointed at AGM, till nextAGM (s396 and s402)

Auditors may resign at any time by notice, statingcircumstances that need be brought to attention ofmembers/creditors, if any, and company mustnotice Registrar and members in 15 days (s417 and

s424)

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Auditorsremoval

Company may remove auditors from office at any time, byordinary resolution (s419)

If members propose removal, they must give special notice

(s419[2])

If public company removes auditors, it must give notice to the

Registrar within 14 days (s419[4])

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Auditors Statement of Circumstances

An auditors right to make a statement of the circumstances

connected with this separation from the company has now

been granted to

(1) a resigning auditor, (2) an auditor who has been removed, and

(3) a retiring auditor who has not been reappointed

(s424, s425(1) and s410)

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Auditorsduties and liabilities

Duty to prepare a report (s405) stating whether:

the financial statements have been prepared in accordance with the CO

the financial statements give a TRUE AND FAIR value of the financial positionand financial performance of the firm

if a) and b) above are not met the auditor must state this in the report alongwith his/her opinion

Duty to investigate (s407) in order to form an opinion as to whether:

Proper books of account have been kept

BS and P&L agree with books of account

Reckless omissions in the report in relation to 1) and 2) is an criminaloffense punishable with a fine of 150.000HK$ (s408)

Obligation to carry out the service as stipulated in the contract with theclient (s415)

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Act honestly, with reasonable care and skill?

In earlier days, Auditor is a watchdog but not a bloodhound, entitled to

assume managers are honest and rely on their representations

- Re Kingston Cotton Mill (1896)

Where suspicion is aroused more care is obviously necessary;but still an auditor is not bound to exercise more than

reasonable care and skill - Re London and General Bank(1895)

More exacting care and skill is expected today than in C19th -

Re Thomas Gerrard & Sons (1968)

Should have investigated more if suspicion

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Auditorsduty of whistle blowing

(Common law) May have duty to report fraud/misconduct toBoard/AGM

Sasea Finance Ltd v KPMG (2000)

(Statutory immunity) May have duty to reportfraud/misconduct to regulatory authorities (see SFO s 381)

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Auditors - liability

Statutory liabilities:

Criminal liabilities: penalties

Civil liabilities: damages

Liabilities under contract:

to company, in damages, for failure to perform with care and skill

Liabilities in tort (negligence): to company

to creditors, investors, individual members

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Auditorsliability for negligence

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Liable to client / company if breach of duty of care in

performing duties

Might be liable to a third party who is shown the accountsand relies on themHedley Byrne v Heller (1963)

To be successful to sue for negligence: Existence of duty of care

Breach of duty of care

Loss

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Existence of duty of care

Proximity and foreseeability

Auditors owed duty to existing shareholders as a whole,but generally not to prospective investors, lenders, orother persons who rely on the audit report, because oflack of proximity

Caparo Industries v Dickman (1990)

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Existence of duty of care

Proximity can be found between the auditor and theperson who relied on the auditors report: Galoo Ltd v Bright Grahame Nurray (1994): if the auditor is made

aware that a particular identified bidder would rely on the auditedaccounts, and the auditor intended that the bidder should so rely

Yue Xiu Finance v Agnew (1996): the auditor knew, or shouldhave known that *the other party+ would rely on their statements

Law Society v Peat Marwick (2000): the accountant knew thepurpose for which the report was required, and that (the otherparty) would rely on it

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Investigations

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Investigations and Enquires (Part 19 CO)

Financial Secretary may appoint an Inspector to investigate andreport on the affairs of the company (ss840-841) where:

The members apply for it (100 members or members representing not less

than 10% of the issued shares

The company asks for it through special resolution in GM

On its own initiative where there is fraud or mismanagement involved

Company officers and agents have a duty to produce books and

documents, answer questions on oath. Non-compliance with a

question of the investigator amounts to an offense (s 863) and

the court may order the compliance of such a request (s864)

Inspectors report to the Financial Secretary is not binding but is

admissible as evidence in legal process (s 862).

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Powers of the Companies Registrar

The Registrar has a new power to require the productionof records or documents, to make copies of the record or

documents and to require information or explanations in

respect of the records or documents, for the purposes of

ascertaining the existence of a offence relating to thegiving of false or misleading information in documents

delivered to the Registrar ([ss873-876, s750[6], s895[1])

Refusal by the company to comply with the Registrarsrequest is an offense (s875)

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