Auditors, like many professionals, owe a duty of confidentiality to their clients. This means that if an auditor discovers fraud, it is strongly arguable that he should take his clients' instructions on whether or not to report the fraud. In many cases, the directors of a client company might prefer not to report the fraud as it may reflect badly on their management, in addition to damaging the company's reputation.
However, for public companies or their subsidiaries, auditors are required to report serious fraud to the Minister of Finance. Under section 207(9A) of the Companies Act, serious fraud is defined as an offfence involving fraud or dishonesty where the maximum penalty is at least 2 years jail and the value of the property involved at worth at least $20,000.
An interesting point about the provision is that the auditor is only required to report fraud against the company by its officers or employees. However, if he discovers that the company is committing fraud against someone else, the provision does not seem to apply(the relevant words of the provision being "is being or has been committed against the company by officers or employees of the company").
Showing posts with label Auditors. Show all posts
Showing posts with label Auditors. Show all posts
Sunday, October 4, 2009
Wednesday, June 24, 2009
Defamation and auditors 2
Another defence that is sometimes important to investigating auditors of fraud is found in section 8 of the Defamation Act.
Normally, the defence of justification to a defamation lawsuit requires that the defamation is literally true. For example, if the auditor makes the statement that the finance manager of a company stole money ten times from the company, but the manager only stole money 9 times, then the defence of justification would fail.
Under section 8 of the Defamation Act, the defence of justification will still succeed even if certain allegations are untrue provided that considering the rest of the true allegations, the false allegations do not materially injure the other party's reputation. There is probably little difference from the defamatory point of view whether a person stole money 9 times or 10 times, so the defence is likely to succeed.
Normally, the defence of justification to a defamation lawsuit requires that the defamation is literally true. For example, if the auditor makes the statement that the finance manager of a company stole money ten times from the company, but the manager only stole money 9 times, then the defence of justification would fail.
Under section 8 of the Defamation Act, the defence of justification will still succeed even if certain allegations are untrue provided that considering the rest of the true allegations, the false allegations do not materially injure the other party's reputation. There is probably little difference from the defamatory point of view whether a person stole money 9 times or 10 times, so the defence is likely to succeed.
Defamation and auditors
As mentioned previously, section 208 of the Companies provides auditors with qualified privilege with respect to defamation lawsuits relating to the audit report.
Defamation occurs where a oral or written statement lowers the reputation of a person. The defamation may occur expressly or impliedly. For example, a statement like "the financial manager embezzled the money" is expressly defamatory while the statement "the clerk was in charge of the missing funds" is impliedly defamatory.
At common law, an auditor also has qualified privilege. This privilege is important when fraud investigations are being carried out. Very often, preliminary statements and conclusons implicating certain person or persons will be made by the investigating auditors before all the evidence is available. Such statements could well turn out to be incorrect.
Qualified privilege will protect the auditors for honest mistakes. They must ensure that the statements are made to the correct persons - those who have an interest in receiving the information or have a duty to receive it, for example, statements about the fraud made to the directors of the victim company or to the authorities. However, statements made to the spouse of the suspected criminal will probably not be privileged.
Defamation occurs where a oral or written statement lowers the reputation of a person. The defamation may occur expressly or impliedly. For example, a statement like "the financial manager embezzled the money" is expressly defamatory while the statement "the clerk was in charge of the missing funds" is impliedly defamatory.
At common law, an auditor also has qualified privilege. This privilege is important when fraud investigations are being carried out. Very often, preliminary statements and conclusons implicating certain person or persons will be made by the investigating auditors before all the evidence is available. Such statements could well turn out to be incorrect.
Qualified privilege will protect the auditors for honest mistakes. They must ensure that the statements are made to the correct persons - those who have an interest in receiving the information or have a duty to receive it, for example, statements about the fraud made to the directors of the victim company or to the authorities. However, statements made to the spouse of the suspected criminal will probably not be privileged.
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