ABSTRACT
The Scotsman of the 6th inst has a contributed article on this subject which we reproduce, as follows:— “In the course of the investigations which have been dragging their weary length during recent months in the English Bankruptcy Courts, not the least interesting and instructive feature has been the public examination, among other officials of the companies in liquidation, of the auditors under whose sanction and upon whose certificate many of the misleading accounts had been issued to the public by the companies involved. The strenuous efforts made by these gentlemen, including some of the most prominent members of their profession in England, to justify themself under the pungent criticisms of the Court and the Official Receivers cannot have formed very pleasant reading either for their professional brethren or for the investing public; and the matter seems to call for more than passing notice. No sort of explanations which may be made after the event can remove the fact that great frauds have been perpetrated on shareholders and creditors alike without these having been discovered or at least exposed by the auditors until it was too late; and it becomes necessary to ask whether, and in what way, the regulations applicable to auditors should be altered so as to make any recurrence of this state of affairs impossible in the future. Now, to arrive at a proper conclusion on this question it is necessary to bear in mind the position which the auditor of a public company occupies. He is a necessary consequence of the adoption of the principle of joint-stock trading. It being impossible for each of the partners or shareholders to examine the accounts showing the results of the company’s working, they appoint a professional auditor for the purpose of safeguarding their interests, and particularly of exercising proper supervision over the actings of the managing partners, the directors. The auditor thus occupies an intermediary position between the shareholders and the directors; in the matter of the accounts he is the agent of the shareholders, and to a certain extent he has power to bind them. In him also is placed the reliance of parties transacting with the company, as they are largely guided in these transactions by the accounts issued by the company, and docquetted by him as correct. It will thus be seen that the auditor’s duties are of the highest importance, and the public are entitled to ask that the check imposed through his appointment shall be real and efficient. That in many cases it has not fulfilled these conditions is only too apparent, and the reason is not far to seek. The position and reputation of the auditors who have been found in default enables us to clear out of the way any question in the general case of fraud, so far as they are concerned. There can be no doubt that the examination which the auditors had thought fit to make did not disclose, in many cases, the frauds which have since been brought to light by the Official Receive and for this the shareholders, in a large proportion of companies, quite as much as the auditors, are to blame. Competition in the field, as in all others, has had its inevitable effect, and too often shareholders, in order to reduce expenditure and increase profit, have exercised a pressure in the matter of the remuneration of auditors which has proved a most unwise economy. That reduced fees should mean inefficient work is, of course, no excuse for the auditor; but it supplies an explanation of his failure to detect in many cases frauds which have cost shareholders and creditors many times the amount of the saving effected by the reduction of his salary. In point of fact, that salary, instead of being a fair remuneration for work done, has rather formed a premium paid to him by the company for the risk incurred by him in appending his docquet to accounts of whose accuracy he was not absolutely assured. Such a state of affairs, of course, removes entirely the advantage and utility of the auditor’s examination, and serious as the result may be, he is, perhaps, not entirely to blame should be judge as to the efficiency of the examination desired by the amount of the remuneration fixed by the shareholders by whom and in whose interests he is appointed. It is a matter for the shareholders themselves whether a thorough or a perfunctory examination is required, and their fixing an inadequate fee may very well be looked upon by the auditor as a tacit hint that an inadequate examination will be quite satisfactory, apart altogether from the consideration at the risk which he incurs should it afterwards appear that he has neglected to observe the provisions on the subject contained in the articles of association.
