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The role of the Auditors in the UK Corporate Governance

( Télécharger le fichier original )
par N'semy Aubin Mabanza
University of Wales, Cardiff Law School - LLM (Master of laws) in Commercial Law 2004
  

Disponible en mode multipage

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TABLE OF CONTENTS

Chapter 1 Transparency in the UK Corporate Governance

1 .1 Introduction

1.2 The Auditors and responsibilities

1.3 The Independence and Integrity of Auditors

1.4 The Audit Committee in the UK

1.5 The Audit Committee in the USA

1.6 Current position under Common law: English law and US law

1.7 Recent development of Auditors liability

Chapter 2 Concept of «Good « Corporate Governance in the UK

Chapter 3 Harmonisation of the European Company law

Chapter 4 Conclusion

Bibliography

ABSTRACT

This paper traces the role of the Auditors in the UK Corporate Governance.

It analyses the internal control and the responsibilities of the auditors. The paper

identifies the importance of the audit committee under Common law, particularly the

English law, and the US law.

The recent development of the auditors' s liability is outlined. The concept of good

governance since the early period, as well as its evolution within Europe is

illustrated. The implementation of the E C Directives in the UK is also examined.

It is concluded that the role of the auditors need truth, independence and objectivity

for the efficient functioning of UK corporate governance. It is pointed that there

is not a single and perfect system of corporate governance to monitor the audit.

It is also pointed that the current rules are inadequate and unsatisfactory to protect

the interest of shareholders and others. It is proposed that to avoid conflicts of

interest, individual rotation of auditors should be absolute under new standards. It is

also proposed that the auditor should have a permanent contact with all actors

who hold company information.

Chapter 1 Transparency in the UK Corporate governance.

1.1 Introduction

The availability of accurate and up-to-date information on company performance

1

is of fundamental importance. In the absence of reliable accounting data, effective

shareholder supervision of management is impossible, as the accurate pricing of

2

shares which is crucial to market modes of control. The sudden collapse in recent

years of a number of well-known companies which, according to their duly audited

accounts, were thriving, has focused attention on the consideration scope for the

3

distorted presentation of financial information.

However, the modern English Company law contains provisions to promote

transparency. S.384 of CA 1985 provides that every company must appoint auditors

except companies which are exempt from the audit requirement. An auditor is a

person appointed to examine the books of account and the accounts of a registered

company and to report upon them to company members. Normally, the auditor is

appointed by the director' s recommendation. However, the relationship between

the auditor and the director's company is prone to vulnerability. The close nature

of their relationship constitutes an important element which has been implicit

in many debates of auditor independence. For many years, external auditors

have contributed in a decisive way to the development of welfare markets.

Moreover, the audit multidisciplinary links have put on the market, on the edge of

the classic control, some worthy activities of advising from non statutory

( lobbing for tax breaks, IT assistance, representation of the internal audit).

1.J.E.Parkinson,'Corporate Power and Responsibility',p.161

2.ibid

3.ibid

This matter is very considerable. On the other hand, the importance to fee income of

non- audit services has been identified as another factor for criticism. For example,

in the Enron case, it has been widely reported that Andersen received $25m in audit

fees and $27m for non audit services; there have been many criticisms about the

potential conflict of interest faced by audit firms which receive large consultancy

4

fees from their audit clients.

Concerns are expressed about how an auditor with a statutory responsibility to

company shareholders can handle a commercial relationship with the company's

5

management and remain impartial. In the UK, one of the issues called by the

Cadbury Report was the establishment of the Audit Committee and the development

6

of the effective accounting standards. Shaken by the Andersen brutal scuttling,

the statutory dispositions of the profession has strengthened quickly for a

7

better independence necessity, achieved in the USA by the Sarbannes- Oxley Act.

On the other hand, the auditing firms themselves have come up with the same

conclusion such as the rotation of auditors, the splitting of their businesses

( non audit services and audit work), the powers of the audit committees.

However, in the light of all these reports we have to note that some problems remain

unsolved. This is not a unique issue. The auditors, like solicitors, have to work

under rules adopted by the profession. However, transparency by companies

management and auditors firms is important to ensure impartiality in an audit

process, especially where auditors supply other activities.

4.The Financial Times ,2001.

5.ibid

6.Cadbury Report ,1992 ,p.38 , para ,5.7

7.The Sarbannes- Oxley Act (SOA) is a US law passed in 2002 to strengthen corporate governance and restore investor confidence. Act was sponsored by US senator P. Sarbannes and US Representative M.Oxley (see http:// six signatutorial.com/Sox/Sarbannes-Oxley).

As in the case of directors, a company may by ordinary resolution at any time remove

an auditor from office notwithstanding anything in any agreement between it and him.

However, in accordance with the law, for the removal of an auditor, special

safeguards are needed not only to protect him, but to protect the company from being

deprived of an auditor whose fault in the eyes of the directors may be that has

8

rightly not proved subservient to their wishes. In other words, a company cannot

remove an auditor against his will without facing a serious risk of a row at the

general meeting (and in the case of a listed company, adverse press publicity)

9

and probably payment of compensation.

As a result of the encouragement from the Audit and Accounting Issues Group and

the EC Commission professional guidance was changed to require the rotation of

the audit engagement partner for listed firms at least every five years and of other

10

key audit partners of listed firms every five years. Finally, a breakdown in relations

between the auditor and the management may reveal itself not in the removal,

11

but in the resignation of the auditor.

1.2 The Auditors and responsibilities.

Fundamental to Financial Statements, an audit is the division of responsibility

between the management and the independent auditors. Although the audit may

act as a deterrent, the auditor is not responsible for preventing fraud or

12

errors. If the auditor identifies weaknesses in the client's accounting

systems and internal controls which might result in fraud not being detected, the

13

auditor should report these to management.

8.Gower and Davies , » Principles of Modern company law » .

9.ibid

10.ibid

11.ibid

12.D.Walters and J . Dunn ,» Student ' s Manual of Auditing the Guide to UK Auditing Practice ».

13.ibid

Under the Statement of Auditing Standards (SAS) 1101, it is stated that 'Auditors

should plan and perform their audit procedures and evaluate and report the results

thereof, recognising that fraud or error may materially affect the financial statement'.

In practice, these provisions illustrate the limits of the audit, also the division of

responsibility between the auditor and the audit clients. The audit cannot be expected

14

to detect all errors or instances of fraudulent or dishonest conduct.

The likelihood of detecting errors is higher than that of detecting fraud, because

fraud is usually accompanied by acts specifically designed to conceal its existence,

such as management introducing transactions without substance, collusion between

15

employees or falsification of records.

One of the most important tasks of a total audit is to report to the shareholders

significant matters that arise during an audit. The work of the auditors carries out, and

the experience of the audit firm's partners, managers and staff , is potentially a

source of greater value to clients; the auditors should be positive and

constructive in conveying views and opinion to clients; it is only through

16

effective reporting to management that this value can be realised.

The audit report must include a statement of the auditor's responsibility for

17

expressing an opinion on the financial statements, this should be as follows:

«It is our responsibility to form an independent opinion, based on our audit, on the financial statements and to report our opinion to you».

14. D . Walters and J . Dunn ,' Student `s Manual of Auditing : The Guide to UK Auditing Practice `.

15. D . Walters and J . Dunn , » Student ' s Manual of Auditing the Guide to UK Auditing Practice ».

16. Gower and Davies , » Principles of Modern Company law » .

17. Statements of Auditing Standard (SAS 100).

According to the Auditing Practice Board, audit of financial statements is an

exercise whose objective is to enable auditors to express an opinion whether the

financial statements give a true and fair view...of the entity's affairs at the period

end and of its profit or loss ... for the period then ended and have been properly

prepared in accordance with the applicable reporting framework or, where statutory

or other specific requirements prescribe the term, whether the financial statements'

18

present fairly'.

In practice, the auditor's potential civil liability for negligence arises in contract or

Tort. When acting for the client, an auditor performs his duties under a contractual

relationship with his company; if he is negligent in the performance of his contractual

19

duties he may be liable to the company for loss arising from negligence. If the

company is in liquidation, proceedings may be brought by way of misfeasance

20

summons under section 212 of the Insolvency Act 1986. In the UK, the duties of

21

auditors depend on the terms of the articles as well as on the statutory provisions.

Under English law, the earlier cases discussed extensively the auditor' s duties.

22

In Leeds Estate Co. v Shepherd, Stirling J. pointed that :

`The duty of the auditor ...[is]...not to confirm himself merely to the task of verifying

the arithmetical accuracy of the balance sheet, but to inquire into its substantial accuracy, and to ascertain that it...was properly drawn up, so as to contain a true and correct representation of the state of the company's affairs'.

18.APB was established in 1991 to advance Standards of auditing and to provide a framework of practice for the exercise of the auditor ' s role ( See D . Walters & J . Dunn ) .

19.Boyle & Birds ' Company Law , p . 450 , 4 t h edition 2000.

20.ibid

21. C .Worth and Morse Company Law.

22 . (1887) 36Ch.D.787 at p.802.

23

In the Kingston Cotton Mill Co, Lopes LJ defined an auditor's duties as follows:

`It is the duty of an auditor to bring to bear on the work he has to perform that skill,

care and caution which a reasonably competent, careful and cautions auditor would

use. What is reasonable skill, care and caution must depend on the circumstances of

each case. An auditor is not bound to be a detective, or as was said, to approach his

work with suspicion. He is watchdog, but not a bloodhound. He is justified in

believing tried servants of the company in whom confidence is place 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 cautions and careful.'

Moreover, an auditor may be liable for negligence to persons relying on his report and

with whom he does not stand in a contractual or fiduciary relationship. The Court of

Appeal in Candler v Crane Christmas had held that a firm of accountants was not

liable in negligence to someone who had relied on a report negligently prepared

by them and which they had known would be acted on by him, and suffered loss as

24

a result, because there was no contractual relationship between the parties.

However, more recently there is a tendency to restrict the liability. In Caparo

Industries plc v Dickman, the House of Lords considered the auditor's duty of care

25

to shareholders and potential shareholders. It held that the purpose of the audit report

was to enable shareholders to exercise their property powers as shareholders by giving

them reliable intelligence on the company' s affairs, sufficient to allow them to

scrutinise the management' s conduct and to exercise their collective powers to

26

control the management through general meetings.

23 .[1896]2 Ch279 ,also Re Equitable Fire Insurance Co [1925]Ch 407.

24. [1951]2 K.b.164,CA

25. [1990]1 All ER 568.

26. R . Wareham , ' Tolley ' s Company Law'.

27

However, the Deloitte Haskins & Sells v National Mutual life Nominees judgement

instead, the House of Lords confined the Common law duty of care within the

statutory framework set by the Companies Act for company accounts and their audit,

28

which by itself is a policy which has much to commend it.

In Electra Private Equity Partners v KPMG Peat Marwick,a crucial initial issue is

that the special relationship does not require that the auditor should consciously have

29

assumed responsibility. The Barings PLC v Coopers & Lybrand case illustrate that

30

a number of different situations have been considered in this light in the case law.

First, within groups of companies, the Courts have accepted that it is arguable that the

auditors of a subsidiary company owe a duty of care to the parent company, since

the auditors will be aware that the parent will rely on the audit of the subsidiary

31

to provide accounts which reflect a true and fair view of the group as a whole.

A second area of tortuous duty to «third» parties involves the directors of the

32

Company by which the auditors have been engaged. Although the Act presents the

compilation of the accounts by the directors and their audit as consecutive and

separate events, in practice the two overlap, with the directors finalising the accounts

33

at the same time as the audit is in progress on the basis of draft accounts.

27.[1993]A.C.774,PC.

28.Gower and Davies , ' Principles of Modern Company law ' , p . 584.

29.[2001]1 B.C.L.C.589,CA.

30.[1997]2 B.C.L.C.427,CA.

31.Gower and Davies , ' Principles of Modern Company law'.

32.ibid

33.ibid

In addition, auditors who come into possession of information about wrongdoing

during the course of their audit may be obliged to report it to the relevant

authorities; auditing standards require auditors to consider whether the public

34

interest requires such action. On the other hand, the Court of Appeal,

in Sasea Finance Ltd v KPMG held that on the basis of this professional

guidance, the auditor' s duties to the company could embrace, as last resort,

35

a duty to inform relevant third parties of suspected wrongdoing. For example,

where the auditors discovered fraud on the part of those in control of the

company so that simply warning the company was likely to be ineffective.

In practice, the test of the public interest is used in order to give auditors

in such cases a defence to an action at Common law by the company for

36

breach of confidence. However, the concern about the independence and integrity

of auditors is based on the influence of non audit services principally to the recent

corporate collapses.

1.3 The Independence and Integrity of Auditors.

The external auditor plays a critical role in lending independent credibility to

published Financial Statements used by investors, creditors and other shareholders as

37

a basis for making capital allocation decisions. Indeed, the public's perception of the

credibility of financial reporting by listed entities is influenced significantly by the

perceived effectiveness of external auditors in examining and reporting on financial

Statements; while any consideration of the effectiveness of external auditors involves

a wide variety of issues, it is fundamental to public confidence in the reliability of

34 . A P B , Statement of Auditing Standards No.110.

35. [2000]1 All ER 676,CA.

36. Gower and Davies , ' Principles of Modern Company law ' .

37. '.Principle of Auditor Independence and the Role of Corporate Governance in

Monitoring an Auditor' Independence'. International Organisation of Securities

Commissions (IOSC),) October 2002.

financial statements that external auditors operate, and are seen to operate, in an

environment that supports objective decision-making on key issues fraying a material

38

effect on financial statements. In other words, the auditors must be independent in

39

both fact and appearance.

The current English law for securing the independence of auditors from management

have focussed to date mainly on placing the appointment, remuneration and removal

40

of auditors in the hand of the shareholders. Everyone concerned accepts the principle

that auditors must be objective and thus remain independent from company

management. The regulatory framework in the UK in respect of non-audit services

requires listed companies and other large companies to disclose in the annual report

the amount of non audit services fees paid to their incumbent auditor.

On the other hand, The Eighth Directive requires that Company Auditors should

conduct audits with professional integrity and independence. Moreover, the recent

Recommendation on Statutory Auditors' Independence suggests that non audit

services disclosure should be further broken down into assurance, tax advisory and

41

other, with details being provided as to the composition of `other'. When acting,

auditors should comply with the ethical guidance issued by their relevant

professional Bodies; each professional body has published detailed guidance on

maintaining professional independence.

38 .'.Principle of Auditor Independence and the Role of Corporate Governance in

Monitoring an Auditor' Independence'. International Organisation of Securities

Commissions (IOSC),) October 2002.

39 .ibid

40 .ibid

41 .European Commission , 2002.

Solomon argued that the desire for auditors to compete on price in offering a number

of services, as well as their desire to satisfy their client's wishes, can lead to

42

shareholders interests being sidelined. Auditing companies offer consultancy

43

services and IT services to the companies that they audit . However,

as the Cadbury Report comments, such a prohibition could increase corporate

costs significantly, as their freedom of choice in the market would be restricted.

Consequently, the Cadbury Report stated that companies should disclose full

details of fees paid to audit firms for non- audit work, such as consultancy.

In 2003, the Smith Report was reluctant to deal with the issue in a proactive manner,

44

the report stated that:

`... we do not believe it would be right to seek to impose specific restrictions on the

auditors' s supply of non services through the vehicle of Code guidance. We are

sceptical of a prescriptive approach, since we believe that there are no clear-cut,

universal answers ... there may be genuine benefits to efficiency and effectiveness

from auditors doing non-audit work'.

In the light of the Smith Recommendations, responsibility for auditor independence

and objectivity is transferred on to the audit committee. The audit committee plays a

key role in the financial reporting process in modern company. The recent scandal

frauds in the UK and in the USA illustrated that there are some common points

between the two systems.

42. J. Solomon and A . Solomon ,' Corporate Governance and Accountability',2004.

43. ibid

44 . Smith Report,2003,p.27,para.3.5

1.4 The Audit Committee in the UK.

The Audit Committee is a committee of directors of a company responsible for

facilitating and improving audits of its financial statements and for dealings

with matters raised by auditors. It is an essential safeguard of auditor independence

and objectivity. In particular, the audit committee should have a key role where the

auditors also supply a substantial volume of non- services to the client. An audit

committee also usually supervises internal auditing. In modern company, the

information given in the directors' report relating to the financial year must

be verified. Usually, to provide such third- party control is the role of audit.

Companies Act 1981 introduced a three-tier size classification of companies (Small,

Medium, and Large) and the option for small companies to file `modified accounts'.

The size of small company that should be exempt from the audit was an important

issue in the debate in the UK. In 1994 the EC fourth Directive permitted national

Governments to dispense with the requirement for small companies to undergo a

statutory audit.

The importance of audit committee was increased with the major reports of 1990s

which had an impact on UK listed companies. The Code of Best Practice of the

45

the Cadbury Committee stated that:

`The board should establish an audit committee of at least three NEDs with written

of reference which deal clear with its authority and duties'.

In 1992 only approximately two thirds of the top UK listed companies had audit

46

committees. The Cadbury Code Provision had the indirect `hidden agenda' impact

of virtually ensuring that the boards of listed companies became balanced

47

through having a significant number of non - executive directors.

45. Cadbury Code , provision 4.3.

46. Price Waterhouse Corporate Register , published by Hamilton Scott .

47 . ibid

In 1998, the Hampel Committee on the financial aspects of corporate governance

and directors' remuneration published its report and the Combined Code which

replaced the Cadbury Code. The recommendations of Hampel were along

similar lines and on similar issues to Cadbury; an important contribution made by

the Hampel Report was the emphasis attributed to avoiding a prescriptive approach to

48

corporate governance improvements and recommendations.

In 2003 a new version of the Combined Code was published, so - called because it

combined the Cadbury (1992) and Greenbury (1995)Codes with the modifications and

additions that the Hampel Committee had decided upon, all of which the Stock

49

Exchange then adopted. The main principle of the Combined Code regarding the

audit committee and auditors is that the board should establish formal and transparent

arrangements for considering how they should apply the financial reporting and

internal control principles and for maintaining an appropriate relationship with the

the company' s auditors (C . 3).

The audit committee is responsible to the board, it exists to assist the board to

discharge certain of its responsibilities, it should satisfy that at least one member of

50

the audit committee has recent and relevant financial experience. The main role and

responsibilities of the audit committee should be set out in written terms of reference

51

and should include:

* to monitor the integrity of the financial statements of the company and any formal

announcements relating to the company's financial performance, to review the

company 's internal control and, risk management systems ( para 3.2.);

* to monitor and review the effectiveness of the company's internal audit function

(para 3.2.3);

48 . J . Solomon and A . Solomon , ' Corporate Governance and Accountability ' , 2004.

49 . A . Chambers , ' Tolley ' s Corporate Governance'.

50.ibid

51.The 2003 Combined Code.

*to make recommendations to the board, for it to put the shareholders for their

approval in general meeting, in relation to the appointment, reappointment and

removal of the external auditor and to approve the remuneration and terms of

engagement of the external auditor (para 3.2.4);

*to develop and implement policy on the engagement of the external auditor to

supply non audit services, taking into account relevant ethical guidance regarding

the provision of non-audit services by the external firm (para 3.2.5).

On the other hand, the establishment of relations between the audit committee and the

shareholders is essential for good corporate governance. The Combined Code

provides that there should be a dialogue with shareholders based on the mutual

understanding of objectives. The board as a whole has responsibility for ensuring that

a satisfactory dialogue with shareholders takes place (para. D.1).

However, the shareholder's contact is mostly with the chief executive and finance

director, the chairman should maintain sufficient contact with major shareholders

to understand their issues and concerns; the board should keep in touch with

shareholder opinion in whatever ways are most practical and efficient (para. D. 1).

Many UK companies already have an audit committee.

J . Charkham argued that in 1994, 53 % of the top 250 industrial firms in

52

The Times 1000 have an established audit committee. In addition, the impact of

the Combined Code on UK companies' directors and industrial investors has

been far- reaching, especially in the area of investor relations and shareholders'

53

activity. In a decade, corporate attitudes toward their core investors have been

54

transformed from relative secrecy to greater transparency. Similarly,

the attitudes of institutional investors have been transformed from relative

55

apathy toward their investor companies activities to an active interest.

52 .J . Chakham , ' Keeping Good Company'.

53.J.Solomon and A . Solomon, ' Corporate Governance and Accountability'.

54.ibid

55.ibid

Even if the UK corporate governance does not provide a requirement for a report

from the audit committee to appear in the annual report of the company, the

Chairman of the audit committee should be available to answer questions at the

56

annual general meeting of the company.

In addition to regular reporting through to the board following each audit committee

meeting, it is good practice for the audit committee to provide a special annual report

57

to the board. Some boards may consider this annual report to be a satisfactory

alternative to regular reporting through to the board following each audit committee

meeting, although there is an obvious need for the audit committee to report to the

board on its scrutiny of interim and final financial results; the annual report will cover

58

the committee's activities over the year.

Regarding the meeting of the audit committee, the agenda plays an essential role.

Errors in minutes are usually errors of omission rather than mistaken minutes;

it is important that the Chairman of the audit committee is effectively in control

59

of both the agendas and the minutes of the committee.

On the other hand, the US Public Oversight Board's new recommendation provides

that the committee should develop a formal calendar of activities related to those

areas of responsibility prescribed in the committee charter, including a meeting plan

60

that is reviewed and agreed to by the entire board. The meeting plan should include

communications between the committee chair or full committee and the auditors

61

before the release of interim or year end financial data .

56 . J. Solomon and A . Solomon ,' Corporate Governance and Accountability `.

57 . A . Chambers , ' Tolley 's Corporate Governance'.

58 .J .Baden ,'The Developing Role of Audit Committee ' , Internal Control(July 1998),

pp.3-6.ICAEW,London.

59.A.Chambers,'Tolley's Corporate Governance'.

60.J.Baden,'The Developing Role of Audit Committee ' , Internal Control (July 1998),

pp.3-6.ICAEW,London.

61.A.Chambers ,'Tolley `s ,Corporate Governance `.

However, the committee's relationship with internal audit is quite crucial. One of

the responsibilities of the audit committee is to advise the board on the effectiveness

of risk management and internal control and so the committee needs to be able

62

to place reliance upon internal audit. A. Chambers argued that it is best practice

that the appointment or removal of the head of internal audit should have

the prior approval of the audit committee; the head of internal audit should have

unrestricted access to the chair of the audit committee at all times and the right to ask

63

for items to be placed on the agenda of audit committee meetings.

In 1999 The Turnbull Committee was set up specifically to address the issue of

internal control and to respond to those Provisions in the Combined Code. The

Report provided an overview of the systems of internal control in existence in

UK companies and made clear recommendations for improvements, without taking

prescriptive approach. In addition, the Turnbull Report represented an attempt to

64

formalize an explicit framework for internal control in companies. Even though many

other countries are now focusing attention on the systems of internal control and

65

corporate risk disclosure within their listed companies. Even before Turnbull there

66

was a trend in this direction, as J. Baden reported :

`We believe that internal audit, as a separate discipline, is no longer cost-effective or efficient. It is, instead, an essential element of the overall corporate risk management system. Good internal auditors must be risk and control consultants. Their job, in part ,is to help the business make more accurate assessment as a basis for commercial

decisions'.

Moreover, the Turnbull Report requires that the board at least annually reviews the

adequacy of the internal audit function or, whether there is no internal audit, considers

67

whether internal audit should be set up.

62.A.Chambers,'Tolley's Corporate Governance'.

63. ibid

64.ibid

65. J. Solomon and A. Solomon ,'Corporate Governance and Accountability `.

66.A. Chambers ,'Tolley `s Corporate governance `.

67.ibid

It is generally admitted that the effectiveness of internal control is essential for

communication between the audit committees and the boards, the audit committee's

68

responsibilities is to review the quality of information that the board receives:

`One of the major requirements for good corporate governance is that the board of the company receives the information it needs to take the decisions it has to take; that this information is reported in a digestible form and that it is accurate. This is something

the audit committee looks at on a regular basis, though it is equally a concern of the whole board who take great interest in this matter'.

The board should certainly be `in the know 'about this whether or not the directors

intend to publish their opinion about it; some organisations are establishing additional

committees of the board, for example, many UK hospital boards of directors now

have clinical governance committees reporting to the board on clinical risk and

69

control which, by and large, is their equivalent of operational control.

1.5 Audit Committee in the USA

Traditionally, directorate audit committees were first proposed in 1939 as a direct

result of the Mckesson & Robbins scandal and in 1940 by the New York Stock

Exchange ( NYSE) and the Securities and Exchange Commission (SEC), were not

70

widely used for many years. Revived interest in audit committees began with a

recommendation for their use by the executive committee of the AICPA in 1967

which stated: 'that publicly owned corporations appoint committees composed

of out side directors (those who are not officers or employees) to nominate the

independent auditors of the corporation' s financial statements and to discuss the

71

auditor's work with them.

68 . A .Chambers , ' Tolley ' s Corporate governance'.

69 . The Turnbull Report is guidance to directors on implementing the section on

Internal control within the Combined Code.

70 .J . Baden , ' The Developing role of Audit Committees 'internal control'.

71. A . Chambers , ' Tolley ' s corporate governance'.

Moreover, the audit committee' s members shall meet the requirements of the

72

NYSE, the SEC and any other applicable law or regulation. The audit committee

shall be independent non executive directors and shall meet at least four times

73

annually or more frequently as circumstances dictate. In 2002,the Sarbanes-Oxley

Act (SOA) operated an important reform on the Accounting Industry. On the other

hand, the New York Exchange ( NYSE ) submitted a rule filing to the SEC which

includes new proposed corporate governance Standards intended to be codified in a

74

new section 303A of the Exchange's Listed Company Manual.

The SOA established a new law against executives who commit corporate fraud and

increase the Securities and Exchange Commission ( SEC) budget for auditors and

investigators; the law is also intended to restore investor confidences in US market

75

after the 2001' s scandals. This reform was a land mark event, representing the most

76

important changes in the Federal Securities laws since the 1930s. However, even if

there are some common points between the new US corporate governance standards

and the Combined Code, the new proposed US Standards do not distinguish between

77

'Principles' and `Provisions'. The scope of these new proposed US Standards is thus

much narrower than the scope of the UK's Combined Code which gives much more

comprehensive coverage of essential elements of corporate governance; the

proposed US Standards appear to be a focussed `fix' designed to address almost

exclusively the corporate governance weakness revealed by the recent US corporate

78

debate. Section 303 A of the new proposed US Standards requires that listed US

companies must have a majority of independent directors not merely non-executive.

72.Norman E . Auebach, ' Audit Committees New Corporate Institution'

73.A.Chambers,'Tolley's Corporate governance'.p.1145

74.ibid

75.A.Chambers,'Tolley's corporate governance'.

76.ibid

77. ibid

78. ibid

The proposed new US Standards elaborate upon the criteria to assess

`independence' whereas in the UK independence is expressed simply as:

... independence of management and free from any business or other relationship

79

which could materially interfere with the exercise of their independent judgement.

Non - executive directors considered by the board to be independent in this sense

80

should be identified in the annual report. A. Chambers points out another element of

comparison between the new proposed US Standards and the UK Combined Code.

In the UK it is for the board to decide whether a director is independent, indeed the

guidance to the US proposed Standards also states that the concern is `independence

81

from management' and a proposal Standards reads:

`No director qualifies as «independent «unless the board of directors affirmatively determines that the directors has no material relationship with the listed company

(either directly or as a partner, shareholder or officer of an organization that has a

relationship with the company).

82

Regarding the specific criteria, the new proposed US Standards provides as follows:

`No director who is a former employee of the listed company can be «independent»

until five years after the employment has ended.

No director who is, or in the past five years has been, affiliated with or employed by

a (present or former) auditor of the company (or of an affiliate) can be independent

until five years after the end of either the affiliation or the auditing relationship.

No director can be» independent» if he or she is, or in the past five years has been, part of an interlocking directorate in which an executive officer of the listed company

serves on the compensation committees of another company that concurrently employs the director.

Director with immediate family members in the foregoing categories are likewise subject to the five years «cooling-off» provisions for purposes of determining

«independence».

79 . A. Chambers , ' Tolley ' s corporate governance'.

80. Combined Code `Provision A 3.2.

81 A . Chambers , ' Tolley ' s corporate governance'.

82.New Proposed US Standards 2.(a),(i) to (iv).

In practice, there are many other possible impediments to independence; notable

amongst the above four given criteria is the introduction of a past audit relationship as

an impediment to independence; it is also notable that, in the third independence

83

tests, interlocking directorships are seen as an impediment to independence.

Under the new proposed Standards, all members of the audit committee should be

independent directors. According to this section, the audit committee is sole authority

to hire independent auditors, and to approve any significant non-audit relationship

with the independent auditors and it must set clear hiring policies for employees or

84

former employees of the independent auditors'. In addition, the new proposed

Standards prescribes that the audit committee must receive at least annually a report

on the independent auditor's quality control and information about certain inquiries

85

and investigations of the independent auditor within the last five years.

1.6 Current position under Common law :English Law and USA.

The CA 1900 provided that in an attempt to ensure the auditors from the management,

the auditor should not be an officer of the company. In addition to the classic

provisions, there is the influence of the European Company Law. The implementation

of the EEC Council Directive of 1984 in the CA1989 is considered as the result of the

legislation on the qualification of auditors. Under s.25 of CA 1989, to be eligible for

appointment as a company auditor, persons must be members of a recognised

supervisory body, and be eligible under its rules to be appointed as company auditor

which in turn requires that they be independent of the company concerned and hold

appropriate qualifications. This is important for the objectivity and the integrity of

the audit.

83.A.Chambers,'Tolley's corporate governance'.

84.ibid

85.ibid

On the other hand, section 53 of CA 1989 stated that where a firm is appointed,

company auditor it is the firm which must be a member of a recognised supervisory

body and be eligible for appointment as company auditor under the rules of the

relevant body. In addition under CA1989, a person whose function is to report to the

members and who originally was frequently also member, the auditor has always

been appointed by the members. One of the most important tasks of the auditors is to

communicate effectively with the shareholders.

In Re London and General Bank it was held that the Standard of care and skill

auditors must exhibit in carrying out their tasks is that of the ordinary reasonable

86

auditor. In view of the professional qualifications now required, and the increased

rights to inspect records and demand information and explanations, it may be doubted

87

whether a Standard based on the nineteenth century case law is still appropriate.

As to the specific issues of the case, Justice Lindley had the following to say:

`It is a mere truism to say that the value of loans and securities depends upon

their realisation. We are told that a statement to that effect is so unusual that

the mere presence of those words is enough to excite suspicion.But,as already stated,

the duty of an auditor is to convey information, not to arouse enquiry ,and although

an auditor might infer from an unusual statement that something was seriously

wrong ,it by no means follows that ordinary people would have their suspicions

aroused by a similar statement if ,as in this case, its language expresses no more than an ordinary person would infer without it.'

88

Under English law, the Kingston Cotton Mill Co. case and the Re London and

General Bank case have formed the basis for all subsequent decisions as to the

89

determine of auditor's negligence. Also, the crucial importance in both instances is

the recognition of auditing as a profession. Finally, we may consider that auditors do

not guarantee that the financial statements a true and fair view any more than

86.[1895]2 Ch 673 at 682-3,CA.

87.Farrar's Company Law.

88.[1896]2 Ch 279

89.[1895]2 Ch 673 CA.

solicitors guarantee to win a case; the auditors warrant to bring to bear the highest

degree of work in the performance of their duties. The reform of the joint and several

liability rule not in favour, attention has concentrated instead on the rules governing

whether and in which circumstances auditors owe a duty of a care to persons other

90

than the company which has engaged them. Under the present rules, each party is

liable for 100% of the loss through dishonest or unauthorised dealing or concealment

of matters from the auditors, with a right of contribution against the others who are

910 92

also liable. In practice, it is the auditors who are sued because of their insurance

cover.

On the other hand, s. 310 of CA has prevented auditors limiting or excluding their

liability, or being indemnified against liability, by contract with the company.

Moreover, there is the work of the Courts which have operated not on any special

rules applicable to auditors but on the application in the auditing context of the

general Common law rules governing liability for economic loss caused by

93

negligent misstatement.

Under the English law, before the Hedley Byrne v Heller, there was no liability for a

negligent misrepresentation made by one person to another even where the person

acted upon the representation to his or her detriment; Hedley Byrne has proved to be

94

of crucial relevance to claims against accountants and auditors. Here, it was held

that in certain circumstances, liability could be incurred for a negligent misstatement

where there was a special relationship between the parties.

90.Gower and Davies , ' Principles of Modern Company law .'

91.Farrar's company law'.

92.ibid

93.Gower and Davies , ' Principles of Modern Company law ' .

94.[1963]2 All ER 575.

In the Hedley Byrne case, the test for liability is:

*Whether the plaintiff is a person, or within a class of persons, who the defendant in preparing, or reporting on the accounts knew, or ought to have known would rely

upon the accounts for a purpose which the defendant knew, or ought to have known.

In general, the liability of the auditors to third parties is more likely to arise if the

audited accounts are shown to the third party either by or in the presence of the

auditor.The scope of the auditors's duties to the company and to shareholders was set

95

out in Caparo Industries Plc v Dickman. Here ,the plaintiffs (Caparo Industries plc),

which had purchased the shares of another (Fidelity plc), brought a lawsuit against

the directors of Fidelity plc and against the auditors. The plaintiffs claimed that the

auditors were negligent in carrying out their audit. As the auditors owed both current

shareholders and potential shareholders a duty of care regarding the audit of Fidelity's

financial statements; that the auditors should have known that Fidelity's profits were

not as high as reported; that Fidelity' s share price had fallen significantly; that

Fidelity required financial assistance; that it was susceptible to a take - over bid;

and that reliance would be placed on the accuracy of the financial statements by any

potential bidder.

It was held that the auditors do not owe a `duty of care' to those third parties who may

place trust in their work or for decisions as to whether or not to extend credit to the

company. Lord Bridge of Harwich cited the CA1985 and referred to the decision of

Bingham J of the Court of Appeal. In his opinion, Bingham J discussed the role of the

statutory auditor under CA1985, stated that the role of statutory derives from the

nature of the public limited liability company.

95.[1990]AC 605 HL.

The shareholders of the plc are its owners, but they are too numerous and too

unskilled to undertake the day-to-day management of the company. Consequently,

the responsibility for the day-to-day management is delegated to the directors of the

company; there is a potential for abuse if the shareholders only receive information

from the directors of the company. On the other hand, section 384 of CA1985

provides that the shareholders of the company should an appoint auditor whose

duty it is to investigate and form an opinion on the adequacy of the company's

financial statements.

The statutory of the framework for company accounts and audits led them to the

following conclusions; the statutory provisions establish a relationship between those

responsible for the accounts(directors) or for the report (the auditors) and some other

96

classes of persons and this relationship imposes a duty of care owed to those persons.

Among these »persons» is the company itself, to which apart altogether from the

statutory provisions, the directors are in a fiduciary relationship and the auditors in a

97

contractual relationship by virtue of their employment by the company as its auditors.

Under Common law once the duty of care is established, for liability to imposed on

the auditor, the auditor's breach of the duty (negligence) must have caused the loss

or damage suffered by the third party; the Courts have relied on the «but for» test

98

for proving causation. However, in recent cases some judges have taken a «common

99

sense» approach to the causation issue. In the Australian case of Alexander v

Cambridge Credit Corporation Limited the New South Wales Court of Appeal

95.Gower and Davies , 'Principles of Modern Company Law'.

96 .ibid

97.ibid

98.ibid

99.ibid

approved the common sense approach to the issue of causation in a case involving

100

auditors. Here, in 1971 the auditors of Cambridge Credit failed to note in the annual

certificate that the accounts did not show provisions which should have been made.

The company claimed damages for negligent breach of contract against the auditors

claiming that « but for» the breach by the auditors the company would have gone into

receivership in 1971. It was held that there was no causal connection between the

1971 breach and the losses suffered later on. In reaching this decision, all the judges

considered that « but for» test was not enough to determine the causation

requirement; McHugh J stated:

«In general, the application of the «but for» test will be sufficient to prove the necessary cause or connection. But that test is only a guide. The ultimate question is whether, as a matter of common sense, the relevant act or omission was the cause».

In the UK, the Galoo v Bright Grahame Murray case follows the Cambridge Credit

as it concerned a claim against auditors and the decision is important for its finding on

101

the causation issue. Here, the auditors of Galoo and its parent company were claimed

to have negligently performed their duties over a five year period by failing to detect

the Court of Appeal argued that although the auditors' negligence gave Galoo the

opportunity to continue to incur trading losses, it did not cause those losses.

The plaintiffs claimed for the losses resulting from the continuation of trading

after the date on which, had the auditors not been negligent, the company' s true

position would have been discovered. The Court of Appeal argued that although the

auditors' negligence gave Galoo the opportunity to continue to incur trading losses, it

did not cause those losses.

100.[ 1987 ] 9 nswlr 310 /credy

101.[1994] BCC 319

According to Glidewell L J, a plaintiff is entitled to claim damages for breach of

contract by the defendant where the breach is the effective or dominant cause of his

loss and does not merely provide him with the opportunity to sustain loss. Further,

in considering whether a breach of duty by the defendant is the effective cause of loss

or merely the occasion for the loss, the Court has to reach a decision by applying

common sense to the facts of the case. It was held that on the facts the auditors'

breach of duty clearly provided the plaintiff with the opportunity to incur and to

continue to incur trading losses, but it could not be said to have caused those losses.

On the other hand, the study of Company Law in the USA shows that the laws differ

among the various States. In addition, the Federal Government law constitutes a

separate system of law. The two most important Federal statutes affecting auditors

are the Securities Act of 1933 and the Securities Exchange Act of 1934,which are

administered by the SEC. The 1933 Act requires audited financial statements to be

included in registration statements filed with the SEC when non-exempt entities

initially offer securities for sale to the public. On the other hand, The 1934 Act

requires public companies with assets in excess of $ 5 million and more than 500

stockholders to file annual reports with the SEC, including audited financial

statements.

In general, the liability of the auditors to third parties under Federal Securities law is

102

greater than under the Common Laws of the various States. However, in most cases

the auditor can defend against suits brought by third parties under Federal Securities

Law by establishing either that the auditor performed his or her professional duties

103

with «due diligence» or that there was no intent on the part of the auditor to deceive.

102. A . Chambers , ' Tolley ' s Corporate Governance'.

103.ibid

However, under common law there have been several ways of viewing (see USA)

auditors' duty of care to third parties; the first view is consistent with the Caparo

decision and argues that the auditor does not owe a specific duty of care to third

104

parties. This is referred to as the strict privy of contract doctrine;

this doctrine was first introduced into the area of auditor' s legal liability by the

105

Ultramares Corp.v Touches case in the early 1930s. Here, the Court found the

auditors guilty of negligence but ruled that accountants should not be liable to

any third party for negligence. The Ultramares case also introduced the concept

of foreseability, which suggests that if the auditor foresaw or could be expected to

foresee that certain persons would use the auditor's report then the auditor might

be held liable for ordinary negligence by the group of persons.

Even though Ultramares introduced the concepts of foreseability and gross

negligence which may constitutes fraud into the discussion of auditors' s liability,

the privy of contract was established as matter of policy via now famous quote from

Chief Justice Cardozo:

`If liability for negligence exists ,a thoughtless slip or blunder, the failure to detect

forgery beneath the cover of deceptive entries, may expose accountants to a liability

in an indeterminate amount for an indeterminate time to an indeterminate class. The

hazards of a business conducted on these terms are so extreme as to enkindle doubt

whether a flaw may not exist in the implication of a duty that exposes to these consequences'.

In addition, Courts in the USA have not found auditors liable under Common law for

ordinary negligence to third parties; to be held liable,the auditor must not only foresee

the use of the audit report by the parties, the auditor must also acknowledge the use

106

of the audit report by the third parties. However, the Caparo case is similar to

Ultramares in its lack of extension of an auditor duty of care to third parties;

104 . ibid

105. (1939) 255 NY.

106. A. Chambers , ' Tolley ' s Corporate Governance'

it can also be compared with the Credit Alliance Corporation v. Arthur Anderson

107

& Co. decision. Here, the New York Court of Appeal reaffirmed the basis rational of

Ultramares and specific three following additional prerequisites before an auditor may

be held liable for ordinary negligence to third parties:

1) the auditor must have been aware that financial statements were to be used for a

particular purpose or purposes by a known party or parties;

2) in furtherance of the particular purpose, the known parties were intended to rely on

the financial statements; and

3) there must be some conduct on the part of the auditor linking the auditor to the

known party or parties that demonstrates the auditor' s understanding of the

reliance.

More recently, the California Supreme Court in Bily v. Arthur Young & Co. ended

108

the foreseeability standard in that stated:

`We conclude that an auditor owes no general duty of care regarding the conduct of an audit to persons other than the client. An auditor may, however, be held liable for negligent misrepresentations in an audit report to those persons who act in reliance upon those misrepresentations in a transaction which the auditor intended to influence...Finally, an auditor may also be held liable to reasonable foreseeable third persons for intentional fraud in the preparation and dissemination of an audit report.'

As G .Quillen pointed out, Bily 's decision has had a profound impact on professional

liability litigation; there has been a well recognized «expectations gap» between

auditors own understanding of their role and the expectations that clients, third

parties, judges and juries often have; Courts, clients, and third parties often seemed

to expect auditors to be able to detect any type of financial statement misstatement,

and assumed that if the auditor 's report did not disclose a misstatement it must be a

109

result of fraud or negligence. Bily has elevated the level of discussion of subsequent

110

accountant liability cases; recent judicial decisions confirm Bily's influence.

107.1985.483 NE 2d 110.

108.3 Cal.4th 370 (1992).

109.G.Quillen,'The Profound Influence of Bily vs. Arthur Young', published in ABTL Report

Volume XXIII No.3,June 2001.

110.ibid

For example, In Marini v . Pricewaterhouse case, the Court applied the essential

teachings of Bily, and it demonstrates that Bily changed the landscape of auditor

111

liability litigation. Here, plaintiffs were individuals including Mr. Marini, the

Chairman of the board of directors of a corporate audit client of Pricewaterhouse

( « PW » ). The individual was also a guarantor of some of the corporation's debt

obligations. Plaintiff sued PW for negligence, negligent misrepresentation, intentional

misrepresentation and breach of contract. It was held that claims for auditor

negligence can be asserted by the auditor 's client only, and not by third parties.

As we can see, under the Federal decisions, Bily impact is still important. It was also

applied in at least three significant decisions, one decided under the federal securities

laws, and two in Securities and Exchange Commission ( « SEC » ) enforcement

112

proceedings against auditors. In Reiger v . Pricewaterhouse Coopers LLP, the

plaintiffs alleged that the defendant («PW») violated Section 10b and Rule 10b-5 of

the Securities Exchange Act of 1934 in a case in which PW's audit client restated

113

financial numbers which had been previously reported on by PW. Here, the Court

ruled that plaintiffs failed to allege scienter on the part of PW and granted PW's

motion to dismiss without leave to amend; it cited several federal cases stating that

auditors will rarely, if ever, have a rational motive for participating in a client's fraud.

In addition, the Court cited Bily as follows:

« Second, because an independent accountant often depends on its client to provide

the information base for the audit, it is almost always more difficult to establish

scienter on the part of the accountant than on the part of its client...»

111 . 70,Cal.App.4th 685 (1999)

112. G. Quillen,' The Profound Influence of Bily vs. Arthur Young'; ABTL Report.

113. Reiger , F.Supp.2d.1003 (S.D .Cal. 2000)

1.7 Recent development of Audit liability

The most common on the corporate governance debate are the duties of care which

are in relation to conduct and supervision of the company's affairs, and in particular

the preparation of the company's accounts. The auditors can be held liable in relation

to their audit of the company 's accounts, if they conduct their business

negligently. On the other hand, there is now a fair amount of case law which

recognises that common sense and logic an important role to play when it comes to

114

determining the cause of a plaintiff's loss.

In South Australia Asset Management Corporation v York Montague Ltd, a

valuer had provided a lender with a negligent over-valuation of a property offered as

115

security for a mortgage advance. The lender gave evidence that the loan would never

have been entered into in the first place if the lender had been aware of the true value

of the property. The House of Lords had to determine the lender's loss, which had

been increased by a drop in property values throughout the market. It was held that

the valuer was not liable for the loss due to the drop in the market.

The House of Lords stated that generally a wrong-doer would only be liable for the

foreseeable consequences of the action being taken in reliance on that information.

The decision makes it clear that a negligent valuer will only be liable for the

consequences of a lender's bad investment which are within the scope of the duty

which the valuer owes to the lender.

The damages awarded against the auditors can be far in excess of their ability to pay,

either from their own resources through their professional cover; the liability system

116

is regarded as a risk transfer mechanism and the auditors are the prime transferees.

114.M.Robertson and K . Burkhart , ' Liability of Auditors to third Parties'.

115.[1996] All ER 365.

116. G.W. Cosserat ,' Modern Auditing '.

On the other hand, the Supreme Court of Canada, in Hercules Management Ltd

stated that accountants can be held responsible in delict or tort to non- clients

117

for the negligent acts they commit in exercising their protection. In an attempt

to determine class or classes of plaintiffs to whom auditors owe duty of care, a

duty of care the Court held that auditors are liable to plaintiffs who are members of a

limited class whose use of and reliance on financial statements are known to them.

Here the Court recognised that in many cases a duty of care exists when it is proved

that the accountant ought to have reasonably foreseen that shareholders, as a class,

will rely on his representations and that the reliance by shareholders was reasonable

(such as in the Caparo Industries plc case). According to the Court, the normal

purpose for which auditors' reports are used, in order to give rise to a duty of care

on their part, is to guide the shareholders as a group in supervising or overseeing

management and not to assist them in making personal investment decision, the

auditors should not, as a matter or policy, be exposed to indeterminate liability.

More recently, in Price Waterhouse v Kwan the Court of Appeal held that the

auditors owe a duty of care in tort to the Solicitors 's clients who invested through the

118

Solicitors `nominee company. Here, the Court found that there was a clear prima facie

case for imposing the duty of care which should be confirmed at trial unless there

emerged some evidence providing policy reasons sufficient to lead to the opposite

conclusion.

117. (1997) D.L.R. (4th ) 577 (S.C.C.).

118 . (2000) 6 NZBLC 102,945

Chapter 2 Concept of `Good `Corporate Governance in the UK

2.1 Introduction

Traditionally, the early work of Berle and Means is recognised as the origin under

119

modern Common law. Corporate governance has been practiced for as long there

have been corporate entities, yet the study of the subject is less than half a

century; indeed, the phrase 'Corporate Governance' was scarcely used until the

120 121

1980s,and the whole topic was overlooked until recently. The expression'....is concerned with the way corporate entities are governed ,as distinct from the way business within those companies are mange. Corporate governance addresses the issues facing boards of directors, such as the interaction with top management , and

relationships with the owners and others interested in the affairs of the company...'

In 1978 Clifford C. Nelson, wrote that' corporate governance is a fancy term for the

various influences that determine what a company does and does not do or should and

122

should not do'. Even if the practice of corporate governance is ancient, the theoretical

123

exploration of the subject is relatively new. All business enterprises need funding in

order to grow, and it is the ways in which companies are financed which determines

their ownership structure; it became clear centuries ago that individual entrepreneurs

and their families could not provide the finance necessary to undertake developments

required to fuel economic and industrial growth; the sale of company shares in order

to raise the necessary capital was an innovation that has proved a cornerstone in the

124

development of economies worldwide.

119. A. A. Berle Jr and G. C. Means, 'The Modern Corporation and Private Property'.

120. R .I. Tricker,' Corporate Governance : History of Management thought'.

121 .R .I. Tricker, 'The Independent Director-A Study of the Non- executive director and

the Audit Committee'.

122 .cited in Dill.1978.

123. R .I .Tricker, 'Corporate Governance'.

124. J. Solomon and A. Solomon,' Corporate Governance and Accountability'.

Solomon argued that the rise of the global institutional investor as a powerful and

dominant force in corporate governance has transformed the relationship between

companies and their shareholders and has created a completely different system of

corporate governance; ownership structure is no longer widely dispersed ,as in the

model presented by Berle and Means, but is now concentred in the hands of a few

125

major institutional investors. Under Common law, since the early period, the House

of Lords' s decision in Solomon v Solomon & Co. Ltd established the separate

126

identity of the company. Here, Lord Halsbury LC said:

`I must pause here, to point out that the statute enacts nothing as to the extent or degree of interest which may be held each of the seven (subscribers ) or as to the

proportion of influence possessed by one or the majority of the shareholder over

the others. One share is enough. Still less is it possible to content that the motive

of becoming shareholders or of making them shareholders is a field of enquiry which the statute itself recognises as legitimate, if there are shareholders, they are shareholders for all purposes; and even if the statute was silent as to the recognition of trust, I should be prepared to hold that if six of them were the cestuis que trust of the seventh, whatever might be their rights inter se, the statute would have made them shareholders to all intents and purposes with their respective rights and liability, and dealing with them in their relation to the company ,the only relations which I believe the law would sanction would be that they were corporators of the body corporate'.

127

The House of Lords 'decision in Solomon has been criticised as going too far.

The contemporary comment of the Law Quarterly Review was that the House

of Lords had recognised that one trader and six dummies would suffice and that the

128

statutory conditions were mere machinery. Farrar points that all legal personality

129

is in a sense fiction the creation of legal artifice. Corporate personality is essentially

a metaphorical use of language clothing the formal group with a single separate legal

130

identity by analogy with a natural person. Metaphors in fact abound in this area of

131

law, both to support and to reject the separate legal personality of the company.

125. J. Solomon and A. Solomon ,'Corporate Governance and Accountability `.

126 . [1897] AC 22 at 49,HL.

127. J. Solomon and A .Solomon, 'Corporate governance and Accountability'.

128. ibid

129. Farrar's company law'.

130. ibid

131.ibid

It is interesting to note that this case thus established one of the basis articles of faith

of British company law, indeed of company law of all Common law systems, that

company is a legal person independent and distinct from its shareholders and its

managers.

The principle of separate identity has been consistently applied as the New Zealand

case of Lee v Lee's Air Farming Ltd, which went to the Privy Council, Lee owned

132

all the shares but one in the company that he founded. His wife held the other share.

Lee was governing director of the company whose business was spraying crops

from the air. When he was killed in a flying accident while on company business,

his widow was held to be entitled to recover compensation from the company

for his estate as the company was quite separate and distinct from her husband its

employee.

More recently, the European Community's 12th Directive on Company Law (89/667),

was enacted in the UK in the form of the Companies (Single Member Private Limited

Company) Regulations 1992, provision has been made for the establishment of true

one man companies. This Regulations permits the incorporation of private limited

companies by one person and with only one member. In the UK, the debate on

corporate governance was greatly influenced by the 1992 Report of the Committee

chaired by Sir Adrian Cadbury on the Financial Aspects of corporate governance.

The Cadbury Report described corporate governance as the system by which

companies are directed and controlled. Boards of directors are responsible for the

governance of their companies. The shareholder's role in governance is to appoint the

directors and the auditors and to satisfy themselves that an appropriate governance

structure is in place.

132.[1961] AC 12

The responsibilities of the board include setting the company's strategic aims,

providing the leadership to put them into effect, supervising the management

133

of the business and reporting to shareholders on their stewardship. The board's

actions are subject to laws, regulations and the shareholders in general meeting. The

importance of corporate governance for corporate success as well as far social welfare

cannot be overstated; recent examples of massive corporate collapses resulting from

weak systems of corporate governance have highlighted the need to improve and

134

reform corporate governance at an intentional level.

2.2 The Boards and Functioning.

A modern British company is based on its constitution, and in particular ,its articles

of association. One of the important matters which are regulated mainly by the articles

is the division of power between the shareholders and the board of directors and the

composition, structure and operation of the board of directors. The board's task is to

approve appropriate policies and to monitor the performance of management in

implementing them. It is the board's responsibility to ensure good governance and to

account to shareholders for their record in this regard.

In Rayfield v Hands, Vaisey J. was prepared to make an order in effect for specific

135

performance. Under s. 282 of CA1985, all companies must have directors. However,

the Act leaves the determination of the functions of the board very largely to the

company's constitution's affairs, so a separation will develop between those own the

133.J.Solomon and A . Solomon , ' Corporate governance and Accountability'.

134.ibid

135.[1958]All ER 194

company (shareholders) and those who manage it (directors).If we look at the Table A

we can see that it supposes that the board will be allocated a very significant role.

According to its article 70, »...the business of the company shall be managed by the

directors who may exercise all the powers of the company...»The Bullock Committee

described that `the role of a board varies from company to company and is constantly

changing with the requirements of business. It may be related to the size, complexity

and nature of the company' s operation and therefore to the organizational structure

which has been developed over many years, it may depend on the philosophy of

136

management in the company or on the personality of the chief executive'.

Parkinson suggests the responsibility of the board which is for long-term strategic

planning, for example, concerning investment in new production facilities and

products, merging or making a bid for another company, closing down existing plants

137

or pulling out of unprofitable markets. Parkinson added, at least in theory, another

important function is to monitor the performance of senior executives, and also the

138

performance of the company's operating divisions and subsidiaries. The main board

will normally be made up of a chief executive, who will hold the office of managing

director, or possibly Chairman, or both, and will include a number of `heads of

139

Department', for example, the finance director, personnel director, technical director.

136. Report of the Committees of Inquiry on Industrial Democracy,1976.

137. J . E . Parkinson , ' Corporate Power and Responsibility : Issues in the Theory of

Company law'.

138. ibid

139. ibid

In general, if for some reason the board cannot or will not exercise the powers vested

in them, the general meeting may do so. In Baron v Potter, action by the general

140

meeting has been held effective where there was a deadlock on the board.

In addition, although the general meeting cannot normally abort legal proceedings

141

commenced by the board in the name of the company.Normally the board of directors

142

is an important element of modern company. In practice, some of them are full-time

directors. Their function is in general to supplement the skills and experience of

143

management team, often by bringing a more dispassionate; understanding to bear on

strategic and optional matters; it is also said that they are able to exercise an element

144

of independent supervision over inside management. Solomon argued that for a

company to be successful it must be well governed; as well-functioning and effective

board of directors is the holy grail sought by every ambitious company; a company's

board is its heart and as a heart it needs to be healthy, fit and carefully nurtured for the

145

company to run effectively.

« Good » corporate governance is viewed as essential in terms of safeguarding

company assets and maintaining investors confidence thus providing greater access to

funds and reducing the potential risks associated with fraud as there was an important

debate about corporate governance in the UK, the Financial Reporting Council and

The Stock Exchange co-sponsored a Committee chaired by Sir Adrian Cadbury. The

Committee's draft Report Financial Aspects of Corporate governance published in

1992 had as its remit: the control and reporting functions of boards, and the role of

shareholders and the role of auditors ( a strengthening of their independence).

140. [1914] 1 Ch 895.

141. J. E .Parkinson, 'Corporate governance and Responsibility'.

142. ibid

143.ibid

144. ibid

145. J. Solomon and A. Solomon ,'Corporate Governance and Accountability `.

The Cadbury Committee's definition of corporate governance as the system by which

companies are directed and controlled' (Report,para.2.5).That definition puts the

directors of a company at the centre of any discussion on corporate governance,

linked to the role of shareholders, since they appoint the directors. One of the

Cadbury Committee' s recommendations was based on the need for boards of the

Directors within listed companies to be effective. The Cadbury report reviewed the

structure of the board and the responsibilities of company directors, the report

recommended that company boards should meet frequently and should monitor

executive management .

According to J . Charkham, in 1995 ICI had sixteen directors, British Telecom

146

fifteen, Grand Met. Eight, Sainsbury twenty- two, BP sixteen. The average for the

147

Top ten companies was sixteen. Smaller companies sensibly tend to have smaller

boards, for example, the Bank of England Quarterly Bulletin in May showed that

of 549 companies in The Times 1,000,39 per cent had between six and eight and

29 per cent between nine and eleven; the 3i Survey shows that 172 of the 215

companies in it had boards of six or fewer, and that this was of companies with a

148

turnover of less than £ 100 million. If we look at the classical board, we can see

that it is the of number of directors who entrusted with the day-to-day

management of the company. The effect of the Cadbury Code is to make non-

executive directors mandatory in quoted companies, since they must have an audit

committee (para.4.3). In addition, the main characteristic of a non-executive director

is that he must not only be independent but be seen to be independent.

149

Sir Cadbury stating that the essential attribute of effective NED is their independence.

146.J.Charkham,'Keeping Good Company'.

147.ibid

148.ibid

149.ibid

The non- executive director (NED) should bring an independent judgement on

issues of strategy, performance, including key appointments, and standards of

conduct (para. 2.1 of Cadbury Best Practice also the Pro-NED). They should be

appointed for specific terms and re-appointment should not be automatic; NEDs

should be selected through a formal process and both this process and their

150

appointment should be a matter for the board as a whole.

However, in practice there is no distinction between the roles of executive and

non- executive directors as both owe exactly the same legal duties and bear equal

responsibility for decisions taken by the board as whole. Their roles are not

formally separated as in other European systems. In the German model, for

example, there is a formal division of duties between the management and

supervisory board. Moreover, in the UK system there are some factors which

exacerbate the problem which prevent NED from being effective monitors of

management; his appointment is still largely in the hands of executives and most of

them are former executives, which mean they are more inclined to be sympathetic

rather than assertive and dynamic in their capacity as NEDs. In the USA, the

proposed new section 303 A requires that listed US companies must have a

majority of independent directors and this clearly may take time to effect.

However, the new proposed US requirement is that the majority of the board

should be `independent' not merely `NED'. Moreover, the movement towards a

greater proportion of outside directors was given a great fillip in the late 1970s as

a result of some cases of extensive misfeasance by executive directors

consequently, in 1978 the NYSE made it a listing requirement that companies

151

should have audit committees of outside directors.

150. J. Charkham ,'Keeping Good Company'.

151. ibid

The outside director's remuneration is founded on an annual retainer which nearly

all companies pay, plus a `per meeting'; US companies are obliged to report

quarterly, most boards, smaller and younger and more independent than they

152

were, meet about six or seven times a year. The board elects a non-executive

director as its Chairman. Contrary to the UK, the practice in the USA is to call that

person the «President»: in the UK, this title does not imply any executive

responsibilities, sometimes conferred as an honorary title. Under CA1985, article

153

of Table A recognises this function. On the other hand, the collapse of Enron, the

former US energy giant focussed attention on the effectiveness of the NED

function. The scandal shook corporate America to the core, and resulted in

reforms to company law.

Enron went bankrupt in December 2001 after it emerged that the company had

Concealed millions of dollars in debts . In light of the Enron scandal, US lawmarkers

154

passed the Sarbannes- Oxley Act (SOA), compelling chief executives to submit a

pledge that they fully understand and take responsibility for their firm's accounts.

Cadbury and Greenbury both recommended that the boards of listed companies

should establish a remuneration committee to develop a policy on the

remuneration of executive directors and, as appropriate, other senior executives; and

to set remuneration packages for the individuals concerned. However, S.12.43 (X)

of the Listing Rules implements most of the disclosure provisions in section B of

the Greenbury Code by requiring companies to include in their annual report:

· a report by the remuneration committee on behalf of the board, covering both

the company's remuneration policy for executive directors; and

· details of the remuneration package of each director.

152. Dorchester Finance Co .Limited v Stebbing [1989] BCLC 498

153. J . Charkham, ' Keeping Good Company ' .

154. The SOA of 2002 is a US law passed to strengthen corporate governance and restore investor

confidence ( see http://six signatutorial. Com/Sox/Sarbannes-Oxley).

In 1995, the Hampel Committee was set up. Its remit was to promote high

standards of corporate governance both to protect investors and preserve the

standing of companies listed on the Stock Exchange (para.1.7). The requirement

was to review the Cadbury Code and its implementation to ensure that the original

purpose is being achieved; to pursue any relevant matters arising from the

Greenbury Report; to look afresh at the roles of directors, shareholders and

auditors in corporate governance. The Hampel Committee produced a report in

1998. It noted that good corporate governance is not just a matter of prescribing

particular corporate structure and complying with a number of hard and fast

rules (para.1.11- 1.14). Instead there is a need for board principles which, the

Committee hoped, will command general agreement and which can be

applied flexibly and with common sense to the varying circumstances of

individual companies(para.1.11-1.20).

As Solomon argued, in some ways (such the role of institutional investors in

corporate governance) Hampel could be interpreted as being less demanding than

Cadbury; indeed, there is a widely held perception that the report represented the

interest of company directors more than those of shareholders and that much of

155

the positive impact from the Cadbury Report was diluted by the Hampel Report.

Certainly, in the area of corporate social responsibility and corporate

accountability to broad range of shareholders, there was a significant change in

tack between the Cadbury Report and the Hampel Report; the latter clearly felt the

need to redress the balance between shareholders and stakeholders and made

156

strong statements on these issues .

155.J.Solomon and A. Solomon , `Corporate governance and Accountability `.

156.ibid

The Hampel Committee stated that:

The importance of corporate governance lies in this contribution both to business

prosperity and to accountability. In the UK the latter has preoccupied much public

debate over the past few years .We would wish to see the balance corrected. Public

companies are now among the most accountable organisations in society...We

strongly endorse this accountability and we recognise the contribution made by the Cadbury and Greenbury Committees. But the emphasis on accountability has

tended to obscure a board's first responsibility to enhance the prosperity of the

Business over time (para.1.1).

Independent NED; while independence had been stressed in the Cadbury, many

companies have appointed NEDs who have previously held executive posts with

157

the company or have been their professional advisers Committee. The Hampel

recommended that its broad principles together with the Cadbury and Greenbury

Codes of Practice should be combined in a single Code which will operate

158

alongside the Listed Rules. In 2002, the UK government asked Mr Derek Higgs to

carry out a review of the role and effectiveness of NED s in comparison with its

counterpart in the USA, the Sarbannes- Oxley Act.

The consultation published a Review ( DTI January 2003). Mr Higgs noted in his

report that there was a widespread concern about the potential liability attached to

non-executive directors, he therefore considered issues relating to the liability of

NEDs in detail, and made some important recommendations as follows:

*he provided guidance, now incorporated in the Combined Code, on the position

of a NED

*he recommended that the Department of Constitutional Affairs(DCA)should

considered step to promote active case management (para.4.8-4.10).

157. Farrar's company law.

158 .ibid

2.3. Internal control in the UK

Internal control is the whole system of financial controls established in order to

provide reasonable assurance of: effective and efficient operations; internal

financial control; and compliance with laws and regulations. Under the UK

corporate governance system, the board of directors is elected by the shareholders

who in practice exercise their control in a number of ways The recent scandals has

159

attracted considerable attention.

There was concern about systems for controlling corporate action, particularly that

of company directors. The role of auditors and the extent of their independence

were criticised; the audit report at the time considered as being the ultimate

indicator of corporate based upon an independent opinion on the company's

affairs became the subject of debate. The Cadbury Report recommended that 'the

directors should report on the effectiveness of the company's system of internal

control' and that this report should be reviewed by the auditors. Moreover, to

enforce the recommendations of the Cadbury Report, sanctions have been

imposed since 1993 for companies listed on the London International Stock

Exchange. With the Cadbury Report, companies boards became more responsive

to shareholders' concerns as it stated:

`Bringing clarity to the respective responsibilities of directors, shareholders, and auditors will also strengthen trust in the corporate system. Companies whose standards of corporate governance are high the more likely to gain the confidence of investors and support for the development of their business'(1.6, p.58).

The Cadbury Report considers that all directors, whether or not they have executive

responsibilities, should be responsible for ensuring that `the necessary controls over

the activities of their companies are in place and working'. In addition, the Cadbury

report' view was that the board of directors is responsible for the governance of

159. Rutternam Working Group,1994.p.1

companies, these responsibilities include the company' strategic aims, providing the

leadership to put them into effect, supervising the management of the business and

reporting to shareholders. However, one of the requirements of the Code of Best

Practice on directors was to include a report in their annual control on the

effectiveness of the company's system of internal control (CBP, 4.5.p.59 ). This latter

requirement was not considered in the draft guidance of the Working Group set up to

develop a set of criteria for assessing effectiveness. In 1995, the Combined Code of

the Committee on corporate governance (the Code) was published. One of its

requirements was to assist listed companies about the internal control question.

Principle D.2 of the Code states that' the board should maintain a sound system

of internal control to safeguard shareholders' investment and the company's assets';

the directors should, at least annually, conduct a review of the effectiveness of the

group's system of internal control and should report to shareholders that they have

done so. The review should cover all controls, including financial, operational and

compliance controls and risk management'(D.2.1).

It was argued that a company's system of internal control has a key role in the

160

management of risks that are significant to the fulfilment of its business objectives.

A sound system of internal control contributes to safeguard the shareholders'

investment and the company's assets; company's objectives, its internal control

organisation and the environment in which it operates are continually evolving

161

and, as a result, the risks it faces are continually changing.

160.A.Chambers,'Tolley's corporate governance'

161.ibid

A sound system of internal control therefore depends on a thorough and regular

162

evaluation of the nature and extent of the risks to which the company is exposed.

Since profits are in part the reward for successful risk-taking in business, the purpose

of internal control is to help manage and control risk appropriately rather than to

163

eliminate it. The Turnbull Report was set up in 1999 to address the issue of internal

control and respond to these Provisions in the Combine Code. It represented the

culmination of several years' debate concerning companies' systems of internal

control. The report was accompanied by the code of practice.

However, Turnbull aimed not to transform companies' systems of internal control but

to make explicit the systems of internal control, which many of the top- performing

companies had developed, in order to standardize internal control and achieve best

164

practice. Solomon suggests that without an effective system of internal control,

companies can undergo substantial financial losses as a result of unanticipated

disasters. In the UK as in the USA the recent collapses of Maxwell, Barings and

Enron have been attributed in part to a failure of the company's system of internal

control. The board of directors is responsible for the company's system of internal

control; it should set appropriate policies on internal control and seek regular

assurance that will enable it to satisfy itself that the system is functioning effectively;

the board must further ensure that the system of internal control is effective in

165

managing risks in the manner which it has approved. Moreover, it is the role

of management to implement board policies on risk and control.

162.A.Chambers,'Tolley'sCorporate governance'.

163.ibid.

164.J. Solomon and A. Solomon , ' Corporate governance and Accountability'.

165.ibid

In fulfilling its responsibilities, management should identify and evaluate the risks

faced by the company for consideration by the board and design, operate and monitor

a suitable system of internal control which implements the policies adopted by the

166

board. In the Enron case, the function of the NEDs was as they did not detect

fraudulent accounting activities through their internal audit function; indeed, the

167

internal audit committee failed completely in policing their auditors. Serious conflicts

of interest have arisen involving members of Enron's internal audit committee, for

example, Lord Wakeham was on the audit committee at the same time as

168

having a consulting contract with a consulting contract with Enron.

These examples show that people in responsible positions who should have detected

unethical activities, were themselves not independent. Enron illustrated that the board

of directors was composed of a number of people who have been shown to be of poor

moral character and willing to conduct fraudulent activity; this was the genuine root

169

of the company's corporate governance failure. Moreover, the internal audit

committee did not perform its function of internal control and of checking the external

170

auditing function. However, it seems that on a practical level the Turnbull Report has

had a far-reaching impact on corporate risk disclosure, as companies have been

encouraged to comply with its recommendations by producing detailed reporting of

171

their risks.

166.J. Solomon and A . Solomon , ' Corporate governance and Accountability'.

167.ibid

168. The Economist , 7 February 2002.

169. J. Solomon and A . Solomon ,'Corporate Governance and Accountability `.

170.ibid

171. ibid

The Cadbury Committee Working Group, limited the directors' s reporting

responsibilities to internal financial control which are those established to provide

reasonable assurance of the maintenance of proper accounting records and the

reliability of financial information. In fact, the internal control process shows the

importance of the non- executive director in the UK corporate governance.

Chapter 3 Harmonisation of the European Company Law.

Under the European Commission, there are several ways of in reforming company

laws. As far as the Member States of the EU are concerned, accounting

harmonisation is an integral part of the development of the Union into a single

«Economic Space». Traditionally, the fundamental EU Directive relating to financial

reporting is the Fourth Company Law Directive of July 25,1978. This relates to the

accounts of limited companies. It was followed by the Seventh Company Law

Directive of June 13,1983, which extends the principles of the Fourth Directive to

the preparation of consolidated ( group ) accounts.

The fourth Directive seeks to provide a minimum of coordination of national

provisions for the content and presentation of annual financial accounts and

172

reports, of the valuation methods used within them, and of the rules for publication.

In addition, the Seventh Directive applied and broadly extended the provisions of

the Fourth Directive to the preparation and publication of consolidated accounts

(Article 1 of Table 6). On the other hand , the harmonisation of the fundamental

rules governing accounting and financial information shows that the EU

has made no further progress. The above Directives have brought about a real

173

improvement in the quality of financial information.

172 . Boyle & Birds 's company law'.

173 . http://europa.eu.int/scadplus/leg/en/lvb/126020.htm

However, large European companies wishing to raise capital on international

markets are obliged to prepare a second set of accounts, which is a lengthy and

174

costly procedure and may give rise to confusion. In the last few decades, a number

of company law directives have been brought into force by the decision of the

Council of Ministers and were subsequently implement by the UK government;

for example, the Seventh and the Eighth Directives deal respectively with

consolidated accounts prepared and published by companies with subsidiaries and

175

with the independence and professional qualification and control of auditors.

The Eighth EU Council Directive addresses the harmonisation of the conditions

for the approval of auditors: professional qualifications, personal integrity and

176

independence. The lack of precision of the Directive, particularly where the

independence is concerned, has led to inevitable differences in national legislation

177

and, in some cases, to an absence of legislation backing. The issues are important in

178

so far as they affect the smooth operation of the single market:

* audited financial statements of a company established in one Member State are

used by third parties in other Members States;

* significant differences in national legislation prevent the establishment of

a genuine European market in auditing services.

However, the absence of a common definition of the statutory audit in the EU

179

creates a damaging expectation gap. Moreover, numerous studies have shown that

there are considerable differences between what the public expects from an audit and

what the auditing profession believes that the auditor should do; a common approach

174. http :// europa.eu.int /scadplus/leg/en/lvb/126020.htm

175. L .Evans and C . Nobes , 'Harmonisation relating to Auditor Independence : the Eight Directive , The UK and Germany».

176.Green Paper on the statutory auditor.

177.ibid

178.ibid

179 . ibid

to the statutory audit, taking account of the latest developments at international level,

seems desirable: if the audit is to add confidence to published financial statements,

180

users need to know what the audit certificate means in terms of guarantees.

Traditionally in the UK before the Directive s.389 of CA1985 excluded a person from

being an auditor if he was an «officer or servant of the company», or a partner or

employee of an officer or servant of the company, or a corporate entity. Moreover,

this prohibition is extended to the company's subsidiaries, holding company and

fellow subsidiaries.

The UK implemented the Eighth Directive through Part II of the Companies

Act 1989; this resulted in few practical changes, and its main impact appears to have

been that more rules were laid down in legislation, instead of, as previously, being

181

left to the profession to regulate. The 1989 Act (section 27) specifies cases in which

a person would be ineligible to act as auditor, thus implementing Article 24 of the

182

Directive, which gives scope to define lack of independence to the Member States.

Included here is ineligibility if the auditor was also ineligible to audit an associated

undertaking; further, the Act requires auditors to be »fit and proper persons». This

relates to Article 3 of the Directive, which requires auditors to be «persons of good

183

repute...» As we can see, the EU legislation on company accounting was

adopted in the 1970s and needs to be updated if is to meet the needs of today's

investors.

180.L. Evans and C. Nobes ,'Harmonisation relating to auditor Independence : the Eighth Directive , the UK and Germany `.

181.ibid

182.ibid

183.ibid

Chapter 4 Conclusion

The independence and objectivity of auditors is vital for the efficient functioning

of UK corporate governance. It is essential for business integrity, and shareholders

confidence. However, independence cannot be complete but its role is relatively

important. The current rules are inadequate and unsatisfactory to protect the

interest of shareholders, bankers and employees of companies.

Moreover, a different problem remains wrongly approached, which is the

requested independence of an external auditor. To definite independence is an

uncertain task as long as its different faces are unstable. Simultaneously, it is hard

to find an auditor remaining independent from the company which he is auditing,

both protagonists have a business relationship and even if the risk of reputation

and being investigated independence are constraints.

In recent collapses, criticisms argued that auditors were not independent in their

work. Some criticism has called into question the multidisciplinary and the

communication defect to other parties concerned in the company functioning.

As far as the multidisciplinary aspect is concerned, it is not bad in itself.

However, conflicts of interest need to be banned for the auditors who audit and

give advice in the same time to the audit client. First, firm rotation would be

seen to overcome these issues. Its benefit is that, together with the commercial

pressure to retain this long-term relationship, it may impede the independence of the

auditors at a minimum; it impacts the perception of independence. Therefore, it can

be said that individual rotation of auditors is also important. Normally, the same

auditor who sign the client account cannot stay for a long period in the

company even if the firm of auditors does not change as after some period

an auditor is a little bit linked as he have signed already in the past, he will

get used some difficulties to another strategy and becoming too close to

the audit client with whom he is involved.

On the other hand, self-regulation is an important issue. The separation of audit

and advice is irresistible. Recently the recent companies collapses, some

auditor firms sold their consultancy branches or operated a distinctive separation.

However, the auditor alerts which facilitate a co-ordination with people ( NEDs,

Lawyers, Bankers) who hold company information need to be widened.

He may have a permanent contact with the banker and other actors. After all,

if the auditor meets the investment banker only during the alert procedure then that

may accelerate the collapse of the company as everyone is aware of the problem.

On the other hand, if these meetings are institutionalised, the question is irrelevant

and every possible meeting with the investment bankers cannot launch a confidence

loss.

The auditors bring into the company an element of transparency. However, questions

still remain about the self-regulating system. If the relationship between the auditors

and the management cannot be avoided, how to establish a perfect system of

corporate governance?

It may be said that there is not a single and perfect system in modern economy.

As in some case, the collapse of a company is caused by a series of factors which

may be external from the auditor's work. More recently, some critics called

the German corporate governance as a model.

S. Suchan pointed for example that the fall of Enron has been understood primarily

as a failure of the gatekeepers, which means the intermediaries who provide

verification and certification services to the investors (e.g. securities analysts and

especially the auditors); under German law the auditor is not only considered to be a

gatekeeper, assuring the interest of the investing public (so called « Kontrollfunktion»

or « Garantiefunktion») but also acts as assistant for the supervisory board in its

184

internal control of the management. The auditors play an important role in modern

companies. Moreover, they contributed in a decisive way to the development of

welfare markets. The topic on their role is linked as on the corporate governance and

for that reason will continue for some years.

184.Dr S.W. Suchan ,« Post-Enron and German corporate governance», Cornell law School, 2004.

BIBLIOGRAPHY

I.BOOKS

BOYLE & BIRDS ' COMPANY LAW, 4th edition Jordans 2000.

CORPORATE GOVERNANCE : History of Management thought, R. I. Tricker,

Cromwell Press 2000.

CORPORATE POWER AND RESPONSIBILITY: Issues in the Theory of company

law, J. E. Parkinson, Clarendon Oxford Press 2000

CORPORATE GOVERNANCE AND CORPORATE CONTROL: Saleem Sheik &

William Rees, Cavendish publishing Ltd 1995.

CORPORATE GOVERNANCE AND ACCOUNTABILITY, J. Solomon &

A. Solomon, John Willey & sons Ltd 2004.

COMPANY LAW, C. Worth & Morse.

FARRAR' COMPANY LAW, Fourth Edition, Butterworths 1998.

GOWER'S PRINCIPLES OF MODERN COMPANY LAW : Paul Davies, 7th

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KEEPING GOOD COMPANY, J. Charkham, Oxford University Press Ltd 1993.

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THE MODERN CORPORATION AND PRIVATE PRPERTY: A. Berle &

G. C. Means, New York 1932.

II.ARTICLES

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PRO-NED 10th Annual Review, September 1992.

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The developing role of audit committee internal control, J. Baden, July 1998.

Audit committees new corporate institution, Norman E. Auebach.

The profound influence of Bily vs Arthur Young.

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Modern auditing, G. W. Cosserat.

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