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Special Committee Companies Bill, 1962 debate -
Tuesday, 12 Mar 1963


Question proposed : " That Section 158 stand part of the Bill."

This is new. I think it is desirable that directors should be required to report to their shareholders.

And it is very commonly done.

To what extent is this new.

It is entirely new.

Could we be told whether or not the auditor has any responsibility for the accuracy or otherwise of the directors' report?

Offhand, I would say not. Section 163 says: "The auditors shall make a report to the members on the accounts examined by them, and on every balance sheet, every profit and loss account and all group accounts . . . ." There is no reference there to the directors' report. I think it would be undesirable that the auditor should have to report on the directors' report because of the nature of the directors' report which will often contain expressions of opinion about business prospects etc.

That is precisely what I have in mind. We should bear in mind that the directors' written report may be much more intelligible to some shareholders than the formal accounts.

But would it not be placing an undue burden on auditors to ask them to have any responsibility for the directors' report?

I think it would be too much of a responsibility.

I would think so.

Directors often attack the Government of the day and deal with other general issues as well. I do not think the auditor——

His would merely be an opinion, too.

But would the directors' report be based on their own knowledge of the accounts of the company or on the accounts as prepared for them by the auditors? I would imagine that in fact the directors' report would be based on the auditor's report rather than on the report, say, from the company's own accounts department—in which case are directors safe in basing their report on the auditor's figures? Is there a division of responsibility there? Are they obliged to go behind the auditor's report to them ?

What section lays down the specific items which have to be dealt with in the directors' report? If they chose to go beyond this, as they normally do, they are talking usually about company policy. That would surely be a matter for the directors only and not for the auditors?

It would be, yes.

I quite agree; it should be. On the other hand, I would be a little bit chary of unscrupulous directors putting their own interpretation on figures and trying to gloss over reality.

But that would be no worse than the present position where the directors are not obliged to furnish a report at all.

That is true.

I think the subject has been discussed before and the opinion expressed usually is that you cannot set out too precisely how the directors are to report because they are reporting largely on the state of the business and you have to express the thing rather generally. If you try to put it into more precise terms you run into difficulties because of the different classes of companies.

Supposing an auditor took exception to an interpretation of figures in a directors' report, would the auditor have the right, as this Bill stands at present, to express his dissent from such interpretation? I do not think he would.

The auditor has pretty wide powers. He might be able to withhold his certificate if he knows what the directors intend to say in their report. I do not know if he is statutorily empowered to do that but as a matter of practice he might take that stand. We must also bear in mind the provisions of Section 163 (4).

Cannot a situation arise where what would happen in practice is that, after the usual routine, the auditors' accounts go to the board for signature, and there is nothing to prevent the directors waiting until they have those documents before they present their report? I think the fundamental question here is that there are two separate functions. The auditors' job is to present the figures, the mathematical data, relevant to the company. This Bill is designed in the Sixth Schedule, and in other sections, to set a standard for that function. I think when the auditors have done that they have done their job.

The responsibility of the directors is, in general, management. If the directors' report is misleading, I think they should clearly carry responsibility for that. That is not the responsibility of the auditors. If you put that responsibility on the auditors you will only give the means to dishonest directors—if there are such—to evade their responsibilities by saying that it was the auditors' function, but I think the auditors' function is merely mathematical.

I think that is correct. Section 163 visualises the auditor giving a certificate in accordance with the practice which Deputy de Valera has described. I doubt if he could withhold a certificate, on the basis of the directors' report, even if he had it.

But he could rely on subsection (4) of Section 163.

I do not think he can withhold the certificate because the section lays down the items he has to cover and the certificate does not include the directors' report. I think Deputy de Valera's statement is correct.

As a specific example, if an auditor returns in his accounts a certain investment at a certain value, which he will do in accordance with some set standard practice, whether it is the purchase price or the market value at the date of the audit or whatever it is, when he has done that he has done his job, and if the directors in their report refer to the investment and the prospects for it, those are things that occur in management. They may say that they think the investment may be expected to be such and such. They may give their prognostications, and if they do that in their report you cannot ask the auditor to take responsibility for that. On the other hand, a too optimistic appreciation of the situation by the directors can amount to fraud. Perhaps the word " fraud " is too strong. It can amount to misrepresentation. I do not think you can mix the two functions there.

Where did the section come from ? Is it new ?

There are sections like it in the laws of Britain and the Six Counties. I have never seen it suggested in any evidence submitted to the various committees by the professional bodies that auditors should be required to report on the directors' report. It may have been recommended, but I have never seen it.

May I suggest which would clarify it ? " Directors' report to be attached to balance sheet." If there is any doubt about the interpretation of " attached" I suggest a drafting amendment to replace " attached " by " accompanied by " which would make the situation clear. I am only trying to help.

I do not think you can interfere with the words "attached" or " annexed " in their special meanings. If you upset that you bring the whole thing down around your ears.

I accept that.

I think that looking at Sections 163 and 164 and the way in which it is spelled out in the Seventh Schedule, there is no doubt that the auditors are not required to report on the directors' report.

Question put and agreed to.