AUDITORS’ LIABILITIES TO ORGANIZATIONS AND SOCIETIES IN GENERAL
The belief that whenever an auditor is engaged with any business organization, the objective(s) of such organization are likely to be achieved, seems not to stand the test of time, considering the rate of business failures and the inherent loss of economic resources resulting from such failures by the stakeholders.
Financial statement is one of the tools which companies employ to present and ex-ray their performance or position over a period of time. It is the duty of Auditors to examine these financial statements and ensure that what companies claim to have, really exists. Stakeholders place their reliance upon these audited statements for their economic decisions. Surprisingly, some of these financial statements that have been reported to have shown a true and fair view and complied with relevant statutes by an auditor, turns out to be a reverse.
It is on the premise of the above, that this research project was set out to actually position. Those factors, which are responsible for the unreliable reports that subsequently lead to business failures, have been unraveled. The researcher also went ahead to portray the impact of these unreliable company financial statements in economy and the possible panacea.
Primary and secondary sources of data were employed, questionnaires were served to company Directors, Financial controllers and senior Accountants engaged with the selected organizations. These companies are manufacturing industries, financial institutions and trading concerns that prepares annual financial statement. On collection of the information (data) from the respondents, they were analyzed using tables, percentages, bar charts and chi-square (X2).
Discoveries were made at the end of the study as follows: That business organizations don’t achieve their objectives with the engagement of auditors, irrespective of the fact that these auditors certify the financial statement after a thorough examination. This unreliable report from corporate auditors goes a long way in misleading the shareholders, government and the entire society leading to the rampart business collapse in the recent time. It was also discovered that the non-independent of auditors and their dual role (e.g. being financial adviser and auditor at the same time) to a company, influences them to give a misleading report.
After the above findings, recommendations were made, thus: Different arms of the law, including Banks and other Financial institutions Board (BOFID), Companies and Allied Matters Decree (CAMD), According Professional Bodies and other regulatory agencies should step in through educating all the concerns, instituting monitoring teams that will ensure compliance to all the laws enacted.
These steps if followed, will no doubt, restore reliance and accountability in relation to the company financial statements in one hand, and the auditors’ report in the other hand
- BACKGROUND OF THE STUDY:
The origin of auditing is as a result of the separation of ownership from control. It is instituted to protect the interest of the owners by ensuring that financial statements are justifiable. Because of the separation of ownership from control, it becomes necessary of those managers entrusted with the owners of financial and economic resources to present their financial reports to their employer. The reports presented might contain errors, omission, and frauds or even refuse to disclose relevant information. For these reasons, the owners may hold some reservations about the credibility of the managers’ reports.
For the owners to be satisfied and even for the managers to be justified to establish and maintain their integrity, it becomes necessary to invite an independent party, one who is not involved with either party to examine the reports for the purpose of expressing an opinion as to the truth and fairness of the reports. The independent party’s duty is not just mere examination of the accounts from which the financial statements were prepared, rather, it include collection of all relevant information thought necessary to satisfy section 360 (3) of companies and Allied Matters Decree (CAMD) 1990. It is obvious that the owners may not be skillful enough or have time to go through this reports in order to assure themselves that the report presented contain no errors or omissions. This independent party is known as AUDITORS or professional accountants. They go extra miles in order to ensure that the financial statement contains no errors, omissions or frauds or where it exists, they detect it. These become their statutory duties or liabilities to organization that invited them.
In the past, investors rely solely on the advice given to them by their financial consultants rather than analyzing the financial statements by themselves. Today there has been a great change on that direction. Many stakeholders including the Government focuses on the financial statements as one of their most reliable source or instrument of assessing the viability or otherwise of companies. Below are some of the interested parties:
- Owners or share holders of companies
- Creditors and debenture holders.
- Employees of organizations
- Government agencies
- Accountants and
- The general public
One question which these managers seem to ask when they report to the owners is: can the owners believe the report? Since the report may contain errors, non-disclosure of frauds, and some omission, thereby misleading.
The panacea to this problem of misleading financial statements lies in appointing independent auditors to investigate the accounts and reports. It is therefore the responsibility of these auditors to ensure that they discharged their duties according to the law. Since it is a liability on the auditors, they should exercise reasonable care and skill to enable them form an unbiased opinion based on their findings.
Auditors are liable under different laws: the common law; the civil law; and the criminal law.
1.1.2 Under Common Law
The general presumption is that any one who is under obligation to exercise care and skill (whether imposed by specific contract or otherwise) must exhibit a reasonable level of care and skill that will conform with the general standards of that particular trade. Failure to exercise such care and skill will render a person liable for damages for any person to whom such duty is owed.
1.1.3 Under Civil Law
Under section 368(1) of CAMD 1990, a company’s auditor must exercise all such skill and diligence, as is reasonably necessary in each particular circumstance. Where a company suffers loss or damage as a result of the failure of its auditor to discharge the fiduciary duty imposed on him as set out above, the auditor shall be liable for negligence and the directors or members can institute an action against him for negligence.
For a company that is in the process of winding-up the auditor may be held liable as an officer of the company and if found guilty of misfeasance, he may be required to contribute to the extent of the loss arising from his breach of trust.
1.1.4 Under Criminal Law.
The auditor may be found criminally liable in the following circumstances:
- If he willfully makes a statement which he knows to be materially false.
- If he publishes or allows to be published a statement which he knows to be false or misleading.
- If he makes a forecast which he knows to be misleading with a view to inducing someone to enter into an agreement.
There are many situations where some reckless auditors fail to comply with the above laws, their fiduciary duties and responsibilities, and consequent upon that, held liable. It may be interesting to sight some of these cases.
1.1.5 Arthur Anderson v. Enron (2003).
Enron, an energy company in America indicted Arthur Anderson – the 5th rated world leading Auditing firm also in America on March 14th, 2002, for satisfying a misleading financial statement prepared by Enron staff without reporting the discrepancies to the shareholders. The charges include:
- Shredding documents relating to Enron.
- Failure to report to the shareholders the main disclosure of some subsidiaries of Enron in the financial statement which he audited;
- Failure to report to the shareholders the non provision for contingent liabilities in the same statement; and
- Outright destruction of an account, which he audited when the matter is already under investigation.
Similarly, the same Andersen was made to refund one hundred and thirty million dollars ($130M) for a questionable audited account by Waste Management Company also in America in 1990.
1.1.6 R.V WALICE V. STONE (1954)
It was submitted that stock and work-in-progress had been valued at a figure considered to be false, accepted an explanation by the managing Director of various alterations in the stock sheets without making any independent investigation, the auditor was convicted in respect of his having signed the report recklessly and was fined $ 299, or alternatively go to jail for six months.
1.1.6 RE-LONDON V. GENERAL BANK (1895).
The Bank had advanced large sums of money to customers on securities, which were grossly inadequate. The interest on these loans were ordinarily credited to the profit and loss account but were never realized. Had adequate provisions been made, the profit and loss account would have shown a loss. The auditor failed to report to the shareholders, the fact that the financial statements are not properly drawn-up. On liquidation, an action was brought against the auditor for negligence and was held liable.
THE COMPANIES AND ALLIED MATTERS DECREE (CAMD) 199-, SECTION 360
This decree gives all the companies in Nigeria, the guideline for their operations. It also went further to stipulate the duties and rights of auditors. In section 360 (1) it stated that their duty is to investigate all the records to enable them give their opinion. In section 360(3) it also state that they should state their findings after investigations .Section 360(3) gave them rights of access to all the documents and information of the company which they are auditing . Section 368(2) stipulated the fines or charges to any auditor who deviates from his responsibilities, and so on.
Cases of the above nature are not exhaustive but only to serve as a deterrent. Different arms of the law have codified the duties, rights, responsibilities and liabilities of auditors such that it becomes embarrassing for any person who held himself out as a professional auditor to deviate from the laws. However, in such an attempt, such an auditor may be made to bear the consequences.
1.2 STATEMENT OF THE PROBLEM
The liability of an auditor appointed by the owners or shareholders of any organization is to ensure that the financial statement prepared from the books and records of that enterprise portrays the actual position of that entity. It is also the auditors’ liabilities to report to the owners of the business whether the financial statement show a true and fair view of that organization and also comply with the relevant laws, these liabilities / duties are spelt out by an Act governing the activities of companies in Nigeria. The Act is known as Companies and Allied Matters Decree (CAMD) 1990. Section 360(1) stated their duties as to investigate all relevant books and documents to enable them give an unbiased opinion. Section 360(3) gives them their rights of access to the documents, while section 368(2) gave enough clue as to what might be their punishments when they go astray.
In view of these facts, there is a popular belief that with the appointment of an auditor in any business organization, the objective (s) of that enterprise, to a great extent, may be achieved. This belief however, appears not to stand the test of time since an auditor is supposed to be a watch-dog, considering the rate of business failures irrespective of the presence of auditors in many business organizations today.
Since the engagement of auditors in business organizations seem not to bring about achievement of organizational goals, one may begin to enquire as to, what might be the cause of such anomalies; whether the cause could be that some auditors are not qualified before going into practice or that some of them are influenced by the managers for selfish interest. More still, whether they exercise enough independence or not well remunerated. The writer argues that none of the above factor is enough for an auditor to compromise his integrity and repute. For an auditor to certify a financial statement which might contain some errors, omissions or even frauds, thereafter misleads the owners of the company and the interested public is a serous offence that demands adequate punishment.
This study is therefore commissioned to investigate the cause(s) of the aforementioned problem. It is also the intension of the researcher to seek for the solutions and thereafter offer some recommendations based on the findings.
1.3 OBJECTIVE OF THE STUDY
With the perception that some auditors do not discharge their responsibilities as required by the law and that some company directors and staff may sometimes prepare a faulty financial statement, thereby misleading the owners of businesses and societies in general contributing to the failures in businesses in the recent time, the objective of this study among others are:
- To evaluate the performance of auditors in carrying out their statutory duties.
- To identify the duties and rights of auditors under the law.
- To determine the extent of independence which auditors exercise in their duties.
- To ascertain the perception of auditors Vis-à-vis the liabilities and the relevant punishments.
- To evaluate the appropriate penalty that can be metered to erring auditors.
- To determine to what extent can the deviation of auditors from the norms, could contribute to business failures.
- To determine the extent of reliance which the owners of businesses and societies place on auditors.
- To see whether these financial statements could actually contain some errors, omission or frauds and what factors may influence the perpetrators.
- To finally make recommendations, based on the research findings, on how to ensure the independence of auditors, and thereafter ensure that the users of financial statement can rely on them.
1.4 SIGNIFICANT OF THE STUDY
This study is primarily designed to identify the duties and rights of auditors in relation to financial statements- prepared by the directors of companies. It will also help to clarity the penalties to the auditors who may deliberately or recklessly give a false impression on the financial statement, which they audited. It will at the same time discourage those auditors who may deviate from the independence [as the major trait in audit] and dance to the tune of management for selfish interests.
Furthermore, the shareholders and other potential investors will henceforth rely on the reports issued by the auditors. The auditors would realize the extent owners of businesses and societies in general place on them and ensure that their integrity is not brought down.
The government and all its agencies, the societies and all stakeholders will assure themselves that their investments and interests are well protected. Finally the investment environment would be stable and crises free. Furthermore, the already disenchanted investors and the society in general will have a course to smile.
1.5 SCOPE/LIMITATION OF THE STUDY
This study is primarily directed to company auditors, the owners or shareholders of business organizations, senior employee of various organizations, Government owned companies and the society in general.
The study is expected to research through different business organizations like: Manufacturing Industries, financial institutions and trading concerns established throughout Nigeria but owing to various constraints including time and financial resources, it would be narrowed to Enugu and Anambra states respectively.
Un-co-operative attitude from the company employees, who may not want to given out information (for fear of implication) could be a serious constraint, but the researcher is of opinion that with his wealth of opinion such hindrance may be insignificant.
It is the belief of the researcher and the general belief that with the appointment of an auditor in any business organization, the objective(s) of that organization may be achieved. The purpose of this study is therefore to establish whether that general belief is true or false. So many factors may be responsible for this belief. Some of these factors are stated below:
- Auditors are specifically trained to assist business organizations with a view to achieving their goals.
- Auditors are statutorily supposed to work independently.
- Auditors appreciate the extent of reliance being placed upon them by business owners, Government and the societies.
- Punishment awaits any auditor who may deviate from his statutory responsibilities.
Hypothesis will be formulated such as to uphold or reject the general belief that with the appointment of an auditor in any business organization, the objective(s) of that organization may be achieved.
Formulation of hypothesis
HO: Business organizations achieve their objective(s) when an auditor is engaged.
H1: Business organizations don’t achieve their objective(s) when an auditor is engaged.
If the Null hypothesis (Ho) is upheld from the data collected, the Alternative hypothesis (H1) is therefore rejected.
Where the Null hypothesis is rejected, in which case, the alternative hypothesis is accepted, whichever may be the case, the prospects of statutory auditors engaged with business organizations, analysis would be carried on that in subsequent studies.
1.7 DEFINITION OF TERMS
Liability is something for which one is responsible for, especially by law.
An auditor is a person who examines the financial statement with a view to expressing an opinion as to whether these statements give a true and fair view and comply with the relevant statutes.
Financial statement is the summary of the financial transactions of an organization for a given period, for example, one year. It is prepared from the documents and records of a financial nature of that organization.
TRUE AND FAIR VIEW.
- True: means consistent with the relevant facts. It is a matter of facts and not subject to judgment or opinion.
- FAIR: This definition is imprecise as it involves a number of thoughts, and can only be defined under the following headings:
- Expectation: Any user of financial statement for instance, has a reasonable expectation that it should conform to generally accepted accounting principles.
- Relevance: from the point of view of a reader (financial statement), fair implies that the view given by the financial statement is relevant to the information needs of the user.
- Objectivity: The user considers the financial statements by reference to externally verifiable facts. Such verifiable facts are the existence of specific assets such as cash. Debtors, stocks, etc.
- Freedom from bias: The reader assumes that the producer of the financial statement does not have any personal bias.
This means freedom from any bias. It also implies an objective opinion without any pressure from all angles against the auditor or whoever may be in such position.
The shareholders are the owners of business organizations and other potential investors.
Frauds exist when officers of a given organization collude among themselves or with the third parties to do away with the cash or other assets of that organization