318 Chapter 11Companies (2): Management, control and winding up
Auditor’s duties
The auditor has two duties, to audit the accounts and to prepare an auditor’s report.
Auditing of the accounts involves carrying out a series of checks and tests to see that they
are fair and accurate. In the auditor’s report the auditor must certify that in his opinion the
books give a true and fair reflection of the company’s financial position and have been
properly prepared in accordance with the Companies Act 2006.
Lopes LJ described the care and skill required of an auditor in Re Kingston Cotton Mill
Co (No. 2) (1896):
An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or
with a foregone conclusion that there is something wrong. He is a watch-dog, but not a blood-
hound. He is justified in believing tried servants of the company in whom confidence is placed by
the company. He is entitled to assume that they are honest, and to rely upon their representations,
provided he takes reasonable care. If there is anything calculated to excite suspicion he should
probe it to the bottom; but in the absence of anything of that kind he is only bound to be reasonably
cautious and careful.
The auditor owes his duty of care and skill to the company and to the membership as whole.
However, the duty is not owed to members of the public nor to individual members of the
company.Liability limitation agreements
Section 534 allows for liability limitation agreements between companies and their auditors.
Such an agreement would limit the amount of a liability owed to a company by its auditor
in respect of any negligence, default, breach of duty or breach of trust, occurring in the
course of the audit of accounts, of which the auditor may be guilty in relation to the com-
pany. The agreement, which can be in respect of only one financial year at a time, must be
authorised by an ordinary resolution of the company members.
Section 537(1) limits the effect of a liability limitation agreement by providing that the
auditor’s liability cannot be limited to less than such amount as is fair and reasonable in
all the circumstances, having particular regard to the auditor’s responsibilities, the nature
and purpose of the auditor’s contractual obligations to the company, and the professional
standards expected of him.
Figure 11.1 shows, in very broad terms, the essential roles of the board of directors, the
shareholders, the company secretary and the auditors.Caparo Industries plc vDickman (1990) 1 All ER 568 (House of Lords)The claimants owned shares in F plc. After receiving the audited accounts of F plc, the
claimants bought more shares in the company and later made a successful take-over bid
for the company. Later they sued the auditors of F plc because the accounts had shown a
pre-tax profit of £1.2 million and the claimants alleged that it should have shown a loss of
£0.4 million. The claimants alleged that the auditors had owed them a duty of care, which
they had breached.
HeldThe auditors owed no duty of care to the claimants.