In pursuit of the auditors' files

An Auditor is deemed to be an Officer of a company (R v Shacter – [1960] 1 All ER 61).

Put simply, the Auditor’s role is to report to the members via expression of an (audit) opinion, on the truth and fairness of the financial statements. Truth and fairness in such regards appears to be a concept which involves consideration of a company’s accounting policies. Those accounting policies need to be appropriate, consistently applied and adequately disclosed. In theory that should result in accounts which are true and fair. It is beyond the scope of this post to challenge such a theory.

Not all companies require audits but when they do, the Auditor, once appointed via resolution of the company, is there to test the integrity and consistency of the annual statutory financial statements.

In performing that role the Auditor is required to report on the adequacy (or otherwise) of the company’s accounting records and whether (or not) the financial statements are consistent with the same. Given the importance to a Liquidator, of a company’s accounting records for investigation purposes, the Auditor’s view on the same can be very relevant. This is particularly the case if the Auditor’s scope has been limited due to any inadequacies in the accounting records. The same might assist the Liquidator’s investigations whereupon any deficiencies with respect to the records that has been noted by the Auditors, can be the subject of suitable scrutiny.

The Auditor also needs to report on the annual statutory financial statements’ compliance with applicable Accounting Standards’ disclosure requirements.

It generally behoves the Auditor via either substantive and / or internal control testing, to compile audit evidence in accordance with Auditing Standards to support any opinion given.

The Auditor is in a special position in relation to a company, being no ordinary third party. He or she is a person falling within the scope of Section 235 of the Insolvency Act 1986, owing mandatory statutory duties to cooperate with the liquidator.

From the perspective of a Liquidator seeking to investigate and unscramble a company’s financial affairs and dealings, the Auditor’s working papers or audit evidence can often be a vitally important source of financial information, which can assist a Liquidator to efficiently understand the structure and breakdown of the numbers contained within the financial statements.

It is often considered that an Auditor’s working papers might be owned by the Audit firm. This may or may not be the case. It can depend upon the purpose behind the creation of documents comprising the audit working papers. For example an Audit firm might be able to offer some assistance to a company in relation to preparing its statutory financial statements. If indeed that is the case the same might involve the offering of some assistance with the accounting records for the company, (without creating the entries for underlying transactions) to enable preparation of the financial statements. Such papers could form documents owned by the company and be required to be kept by the company pursuant to Sections 386 and 388 of the Companies Act 2006.

To determine the ownership of a document it may be that the purpose behind its creation might need to be carefully considered. Depending upon the same the Liquidator might be in a position to claim ownership. That might unlock for the Liquidator information that could assist in his or her investigations.

However, if the test of ownership were to fail for the Liquidator in relation to any audit working papers, then generally the Liquidator has another route to obtaining the same that is reasonably required. This position appears to have been helpfully set out in British and Commonwealth Holdings plc (joint administrators) v Spicer & Oppenheim (a firm) (1992) 4 All ER 876 (“B&C”) when the Court appears to have come to the assistance of an officeholder seeking files of auditors:

“It was in the interests of the creditors of the company and in the public interest that the administrators should be able to conduct their investigations as thoroughly as possible…”

“A reason for conferring the power is that the office-holder “usually takes office as a stranger to the relevant events:” see per Slade J. in In re Castle New Homes Ltd. [1979] 1 W.L.R. 1075, 1080D.”

“In this connection I also find assistance from a passage from the judgment of Buckley J. in In re Rolls Razor Ltd. [1968] 3 All E.R. 698, 700, cited by Slade J. in In re Castle New Homes Ltd. [1979] 1 W.L.R. 1075, 1086. What Buckley J. said was:
“The powers conferred by section 268 are powers directed to enabling the court to help a liquidator to discover the truth of the circumstances connected with the affairs of the company, information of trading, dealings, and so forth, in order that the liquidator may be able, as effectively as possible and, I think, with as little expense as possible and with as much expedition as possible, to complete his function as liquidator, to put the affairs of the company in order and to carry out the liquidation in all its various aspects, including, of course, the getting in of any assets of the company available in the liquidation.”” [my added emphasis]

The aforesaid is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same.

If you have a specific query then you should seek independent legal advice on the same.

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