Mischief in cryptic information

Mischief in cryptic information

Sample this situation, about the auditors who made a confidential report to the directors of a company calling their attention to the fact that the security for substantial amount of loans was insufficient and that a major part of the debts was not realisable. “Under these circumstances, they advised that no dividend could be paid for the year. In their report to the shareholders, however, the auditors only made a cryptic remark that the value of assets was dependent upon realisation. The directors recommended a dividend of 5 per cent.”

Giving this as a practical problem, A. K. Majumdar and G. K. Kapoor pose the question whether the auditors are liable. Their answer – as discussed elaborately in Company Law and Practice, sixteenth edition ( www.taxmann.com) – is that an auditor who gives to shareholders the means of information, instead of the information itself, in respect of the company's financial position, has failed to discharge his duty and will be liable.

For, a person whose duty it is to give information cannot be said to have discharged his duty simply giving others so much information as is calculated to induce them to ask for more (The London and General Bank Ltd case of 1895). “The auditors were expected to have stated in unequivocal terms that the securities for the loans were insufficient and that their realisation would be difficult. Auditors shall, therefore, be liable to make good the loss which the company has suffered, viz. dividends paid plus any other loss that could be shown as directly flowing from breach of duty. Besides, auditors may be fined up to Rs 10,000 under Section 233 of the Companies Act for not making a report in accordance with the requirements of Section 227.”

Time we looked around for aberrations in audit, armed with the educative guidance given in the book!

D. MURALI

(This article was published in the Business Line print edition dated August 25, 2011)