JAN 2018 (Q4)

a)

The issue is whether Dorami, an auditor of Doramon Sdn Bhd had the right to request
the Board of Directors for the minutes of its last meeting.

Every company must have their accounts audited and thus must appoint at least one
auditor to audit its accounts. According to section 264(1)(c)(i) provides that a person may act
as an auditor only if he is approved as a company auditor by the Minister charged for the
responsibility for finances. He also must be a chartered accountant as defined under the
Accountant Act 1967. Further, section 264(5) provides that he may not be appointed as the
auditor of the company unless he has given his written consent to the appointment. Thus, it is
important to know who the approved company auditors are, and what are the disqualifications
listed in Section 264.

Section 266(4) stated that an auditor of a company has right of access at all reasonable
times to the accounting and other records, including registers of the company and is entitled
to require from any officer of the company and any auditor of a related company such
information and explanation as he desires for the purpose of audit. Next, under Section
266(5) stated that an auditor of a holding company for which consolidated financial
statements are required (a) has a right of access at all reasonable times to the accounting and
other records, including registers, of any subsidiary, if necessary: and (b) is entitled to require
from any officer or auditor of any subsidiary included in the consolidated financial
statements, at the expense of the holding company, such information and explanations in
relation to the affairs of such subsidiaries included in the consolidated financial statements.
Next, under Section 266(6) stated that the auditor’s report shall be attached to or endorsed on
the financial statements or consolidates financial statements and shall, if any member so
requires, be read before the company in general meeting and shall be open for inspection by
any member at any reasonable. Another rights as an auditor according to section 266(7) is an
auditor of a company or his agent authorized by him in writing is entitled to attend any
general meeting which a member is entitled to receive, and to be heard at any general
meeting which he attends on any part of the business meeting which concerns the auditor in
his capacity as auditor.
 Next, according to section 266(12) an officer of a corporation who refuses or fails
without lawful excuse to allow an auditor of the corporation, or an auditor of a corporation
who refuses or fails without lawful excuse to allow an auditor of its holding company which
is (a) to have access to any accounting and other records, including registers of the
corporation in his custody or control. (b) to give any information or explanation as and when
required under this section or (c) otherwise hinders, obstructs or delays and auditor in the
performance of his duties or exercise of his powers, commits an offence and shall on
conviction, be liable to imprisonment for a term not exceeding 3 years or to a fine not
exceeding RM 500,000 or both.

In the situations of Dorami who is an auditor of Doramon Sdn Bhd, has requested the
Board of Directors for the minutes of the company last meeting. The Chairman of the Board
turned down his requested that the contents of the minutes were confidential and because of
that Rama cannot prepare a satisfactory report on the company’s affair. According to Dorami
situations, he has the right to access all the companies information including requesting for
the minutes of the company last meeting as stated in section 266, in order for his to give true
and fair view in the financial statement. When the Chairman of the Board, who refuses or
fails without lawful excuse to allow an auditor of the corporation, the Chairman shall on
conviction, be liable to imprisonment for a term not exceeding 3 years or to a fine not
exceeding RM 500,000 or both.

In conclusion, Dorami can take an actions towards the Chairman of the Board when
he does not cooperate with the auditor of the company and the Chairman shall on conviction,
be liable to imprisonment for a term not exceeding 3 years or to a fine not exceeding RM
500,000 or both.
b)

Based on the situation given, the issue is whether Mr Magoo can sue Didi for the loss
he had suffered with regards to the shares.

According to section 264(1)(c)(i) of Companies Act 2016 provides that a person may
act as an auditor only if he is approved as a company auditor by the Minister charged for the
responsibility for finances. He also must be a chartered accountant as defined under the
Accountant Act 1967. Further, section 264(5) of Companies Act 2016 provides that he may
not be appointed as the auditor of the company unless he has given his written consent to the
appointment. Thus, it is important to know who the approved company auditors are, and what
are the disqualifications listed in Section 264.

Based on the Companies Act 2016, an auditor is under to use reasonable care and skill
in carrying out the audit and in forming an opinion on the company’s account. A failure to
use reasonable care and skill renders an auditor liable to the company in damages for (a)
breach of contract and (b) negligence.

Other than that, when an auditor is appointed, he will enter into a contract with a
company. Apart from his contractual obligations, the auditor is also imposed with certain
duties by common law and statutory duties. There is a contractual relationship between the
auditor and the company. Thus, the following doctrine of privity, where only parties to the
contract can sue and be sued under the contract, a member of the public or even a member of
the company cannot sue the auditor if the auditors breach his contractual obligations towards
the company. However, there are other circumstances where the court may find the auditor
liable to a third person who relied on the audited accounts if the conditions are fulfilled which
are the auditors owe them a duty of care in carrying out the audit and in preparing and
making their report, the auditor breach the duty of care, the loss or damage suffered by the
plaintiff was foreseeable and as a result of that breach they suffer loss.

Next, an auditor must provide a report which is circulated among the members. This
does not mean that auditors cannot communicate their finding to and seek explanation from
the officers of the company. In particular, if fraud is uncovered or suspected, the auditor is
under a duty to report promptly the matter to the director or other appropriate management of
the company. He cannot just wait until the AGM to report to the members.
 According to section 266(1) every auditor of the company, shall report to the
members on the financial statements and on the company’s accounting and other records
relating to those financial statement and the report shall be (b) in the case of private company
circulate to its members or laid before the company at a meeting of members.

While in section 266(2) an auditor shall in a report under this section, whether the
financial statements are in his opinion properly drawn up (i) so as to give a true and fair view
of the matters required by section 248 to be dealt with in the financial statement (ii) in
accordance with this act so as to give a true and fair view of the company’s affairs and (iii) in
accordance with the applicable approved accounting standards, or in the case where financial
statement are required to be prepared for or lodged with the authorities referred to in section
26D of the Financial Reporting Act 1997 such financial statements shall be made in
accordance with the applicable approved accounting standards subject to any specifications,
guideline or regulations as may be issued by such authorities.

Section 266(3) describes that an auditor of the company shall have a duty to form an
opinion to each of the matters (a) whether he has obtained all the information and
explanations that he required (b) whether proper accounting and other records, including
registers, have been kept by the company as required by this act. According to section 266(8)
if an auditor in the course of the performance of his duties as auditor of a company, is
satisfied that (a) there has been a breach or non-observance of any of the provisions of this
act (b) the circumstances are such that in his opinion the matter has not been or will not be
adequately dealt with by comment in his report on the financial statements.

Any auditors who contravenes section 266(8), according or section 266(9) the
auditors commits and offence and shall, on conviction be liable to imprisonment to a term not
exceeding 5 years or to a fine exceeding RM 3,000,000 or both.

In Malaysia, the Malaysian Institute of Accountants Recommended Practice Guide 6

recommended the incorporation of the following disclaimer in audit reports to limit the
auditor’s legal duty of care to the audited company and its member as a body: “it is our
responsibility to form an independent opinion, based on our audit, on the financial statements
and to report our opinion, to you, as a body, in accordance with Section 266 of the
Companies Act 2016 and for no other purpose. We do not assume responsibility to any other
person for the contents of this report.”
 Based on the case of Caparo Industries PLC v Dickman & Ors (1990) held that the
statutory audit and the audited accounts are for the company and shareholders as a body.
Thus, an auditor appointed to audit the company’s accounts owes a duty towards the audited
company and its members a body.

Rely on the case of Shaddock & Associates Pty Ltd v Parramatta City Council (1981),
in this case the High Court of Australia held that the duty to take reasonable care arises “
whenever a person gives information or advice to another upon a serious matter in
circumstances where speaker realises, or ought to realise, that he is being trusted to give the
best of his information or advice as a basis for action on the part of the other party and it is
reasonable in the circumstances for the other party act on that information or advice the
speaker comes under a duty to exercise reasonable care in the provision of the information or
advice he chooses to gives”.

Based on the case Re London & General Bank stated that auditors are appointed to
safeguard the interest of the shareholders and to check on the directors and through them on
management. However, this does not mean that in performing their duties the auditors deal
only with the shareholders or avoid communication with management or that they can
properly perform the audit without communication from and to management in appropriate
cases. The auditors perform their duty to the company and safeguard the interest of the
shareholders by making communication, properly called for, to the appropriate level of
management or the directors, during the course of the audit, with an appropriate report to the
shareholders at the AGM. They do not perform such duty if, having uncovered fraud or
having suspicion of fraud in the course of the audit, they fail promptly to report it to the
directors and perhaps in the first instance, according to the circumstances, immediately to
management. Also, an auditor will breach his duty if, having detected a possible irregularity
not amounting to a suspicion of fraud, fails to investigate further and report the matter.

In this situation, Didi who is the auditor of Pokochu Sdn Bhd owe them a duty in
preparing making company report. In Jan 2017, Mr Magoo bought shares in the company
based on the auditor’s report which revealed that the company has recorded increasing profits
over the past five years. Then Mr Magoo has recently discovered that no such profits were
made by the company. Didi breach the duty of care because he does not responsible to take
care of shareholders interest. Since Didi breach the duty of care, it causes damage to Mr
Magoo. As a result of that breach, Mr Magoo as a shareholder suffer loss because of there
was no such profits were made by the company and the shares he bought were worth much
less than what he had paid. This case can be relate with the case of Caparo Industries PLC.
Since the company suffers loss or damage as a result of the auditor’s failure to exercise the
standard of care that is expected of another reasonable auditor in that same situation, the
company may sue him for damages under the tort of negligence.

Next, Didi as an auditor must appointed to safeguard the interest of the shareholders
and to check on the directors and through them on management. But he does not safeguard
the interest of the shareholders. Since he do not perform such duty if, having uncovered fraud
or having suspicion of fraud in the course of audit. Then, Didi as an auditor breach his duty
because Mr Magoo have detected a possible irregularity amounting to a suspicion of fraud
and Didi fails to investigate it.

In conclusion, Mr Magoo cannot sue Didi due to the loss suffered with regards to the
shares because it is auditor’s responsible to form an independent opinion in accordance to
Section 266 of the Company Act 2016. Since there is a safeguard for the auditor from being
liable to the outsider so Mr Magoo as a third party cannot sue Didi for the losses.