Is an auditor/accountant suable if aware a client company is trading recklessly and reneges on informing authorities ?

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trajan

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A small company is in trouble. Its external accountant knows this from the accounting data he receives weekly.

Still the company's management plans to continue to trade despite having no realistic hope of being able to pay suppliers or other creditors.

Does this accountant have a clear legal or professional obligation to inform the relevant authorities so the company is ordered to cease trading ?

If the accountant does not so do, would they be suable by the authorities or the company's creditors ?
 
It's difficult to comment in the absence of full facts, but in short the answer to both your questions is no.

There is no mechanism nor obligation to report suspicions of such a state of affairs to any external authority, so your question of anyone outside the company reneging on such an obligation is moot.

Responsibility for the conduct of a company's affairs lies with its directors.

If the company in question is a small company, it's highly unlikely that its external accountant is also its auditor. A tiny percentage of small companies are liable for statutory audit.
 
trajan said:
Its external accountant knows this from the accounting data he receives weekly.
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Looks like a shadow director.

If the external accountant makes a target, i.e. is wealthy, a creditor could seek to make him liable by suggesting that he was acting in the role of director. An external accountant receiving weekly data seems unusual to me, why is he receiving that if not acting in an FD role.
 
@T McGibney

Thanks for response.

You would be right regarding the auditor and a small company. It seems that the (obligatory) audit exemption limits have gone up quite a bit since the new Companies Act. So few small businesses would be liable for an obligatory audit.

But I would have thought that an external accountant would have far more certainty than mere suspicion of reckless trading in such a situation, i.e. they would already know all they need to know about the company's assets, liabilities, revenue, expenses, borrowing commitments, etc.

What they may not know would be the extent of the company owners' personal assets - which might well be of such a scale as to make possible, e.g. through recapitalisation, a perseverance with a hitherto unprofitable business model in the hope that it may turn itself around before owners' funds dry up entirely.

So it seems that unless a small company has its own internal financial controller - who must also be a company director, you imply - then the obligation to recommend a cease to trading by the company and, where such recommendation be ignored, a concomitant obligation to report the company's position to the authorities, does not apply.
 
cremeegg said:
An external accountant receiving weekly data seems unusual to me, why is he receiving that if not acting in an FD role.
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Well, the bookkeeping data is often updated weekly. So the external accountant would be given the bottom lines for stuff like purchases, sales, expenses, etc so he/she could analyse performance versus the business plan, etc.

There is no obligation that I am aware of to make an external accountant a financial director of one of his/her client businesses.
 
So it seems that unless a small company has its own internal financial controller - who must also be a company director, you imply - then the obligation to recommend a cease to trading by the company and, where such recommendation be ignored, a concomitant obligation to report the company's position to the authorities, does not apply.
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I neither said nor implied anything of the sort.
 
trajan said:
There is no obligation that I am aware of to make an external accountant a financial director of one of his/her client businesses.
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Of course not, but a creditor might seek to persuade the court that he was acting in the capacity of a director,




The following are legal categories of company directors.

Shadow Directors

Any person, other than a professional adviser, in accordance with whose directions or instructions the
directors of a company are accustomed to act is a ‘shadow director’. A ‘shadow director’ will be treated
as a director of the company for the purposes of Part 5 of the Act8. In addition under section 231 they
have additional duties to disclose any interest in a contract s/he or a connected person has with the
company whether directly or indirectly, by writing to the directors to inform them. Many of the legal
responsibilities of a director apply to “shadow directors”.
 
T McGibney said:
I neither said nor implied anything of the sort.
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Responsibility for the conduct of a company's affairs lies with its directors.

If this be the case then only a director may advise a trading cease. Should such advice be ignored, what should any responsible director do - before resigning - if not inform the statutory authorities ?

Which director would likely be in full possession of the facts regarding a company's capacity to meet its debts in the short and medium term but the financial director ?

How can other directors, especially those in non-finance functions, really know how close to the wind they are sailing if the accountant doesn't tell them ?

All that said, I would expect that any professional accountant would see it as part of their professional duty to advise a company board when it may be in danger of trading recklessly.
 
Just wondering if the company is audited. And if so when was the last audited set of financial statements signed.

Otherwise why would the auditor be anyway relevant
 
Annieindublin said:
Just wondering if the company is audited. And if so when was the last audited set of financial statements signed.

Otherwise why would the auditor be anyway relevant
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This is not a question about a specific company - it's more a generic question regarding accountant's duties.

Also auditing is not all done overnight. And small companies with an auditor would often have a bookkeeper who is chosen by the auditor and likely sending weekly/monthly status reports to the auditor. In such a situation, an auditor may have seen enough prior to submitting any true and fair accounts to convince him/herself that the company is trading recklessly.

If the company is not audited, the accountant who would otherwise be the auditor may well be acting as accountant/financial adviser to the business. He/she would have the same bookkeeper's reports and could make the same deductions.
 
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The duties of a company's external accountant are primarily owed to the company. If he's aware that the company is or may be trading while insolvent his duty is to point this out to the directors. If the directors ignore his advice he might want to consider whether he still wishes to advise the company — a professional adviser is in a very embarrassing sitution if his client has, or appears to have, no confidence in the advice he gives.

If he also carries out a statutory audit function for the company, he has duties that are owed to the shareholders. But in the context of a small company shareholders and directors are often very overlapping groups.

But I struggle to see how creditors of the company are going to have a remedy against the accountant whose advice is ignored. Cremeegg suggests that the accountant may be held to be a shadow director, but the definitino of "shadow director" that he quotes has an express carve-out for professional advisers. A professional adviser will not be a shadow director in the absence of some highly unusual facts.
 
Responsibility for recording transactions is not the same as initiating transactions.

The directors are responsible not the external contractors who are hired to keep records.

If the company hires someone to BE a financial adviser that’s a different role but it’s still only advice and they may not follow it. Proving that the accountant was hired to provide advice and then failed to do so or did it badly or recklessly is a big leap.

An accountant might look at records and interim or management accounts, or even year end accounts that show a business in trouble (this would be an opinion, a judgment btw not a fact) but they can’t contact the CEA and share private information. (Or Revenue or whoever you think the relevant authorities are.)
 
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TomEdison said:
But I struggle to see how creditors of the company are going to have a remedy against the accountant whose advice is ignored. Cremeegg suggests that the accountant may be held to be a shadow director, but the definition of "shadow director" that he quotes has an express carve-out for professional advisers. A professional adviser will not be a shadow director in the absence of some highly unusual facts.
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Yes, I was looking at that last night. It seems that the shadow director is envisaged as a sort of "sleeping partner" in the company rather than a professional adviser or expert service sub-contractor.

Okay, it seems that consensus here (T McGibney exempted from explicit commitment, of course) has an external accountant/auditor only obligated to advise a company's directors of its potentially dangerous state vis-à-vis reckless trading - there is not professional or statutory obligation to inform any authorities. The external accountant/auditor may even continue to act in such capacity following the company's ignoring his warnings and face no statutory or professional sanction.
 
Two things to add here:
- an auditor is expressly forbidden from making or participating in management decisions in or on behalf of any of their clients. If they do involve themselves in such decisions, they must resign from their auditing role, in which case they are usually free to continue to advise or assist the company if that is desired.
- an external accountant must at all times in their work retain a degree of professional independence from their clients. The obverse of this is that a client should always retain the freedom to ignore or reject advice proffered by their external accountant (assuming of course that such rejection does not involve or facilitate lawbreaking).
 
If they reported reckless trading to the CEA or anyone else they’d be facing a hearing and possible sanctions from their professional body…. Assuming they are a member of one of course.

Anyone can set up in business as an accountant, not an auditor, no education etc required. One might be foolish to hire someone like that but the law allows it
 
Annieindublin said:
Anyone can set up in business as an accountant,
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Why is this still allowed ?

The BCA outlawed (albeit with a sunset clause to existing players) self-taught architects and surveyors.

Why doesn't the hugely influential ICA, ICMA, ICCA, IPA, etc lobby like hell to ensure this state of affairs is no more ?
 
T McGibney said:
Because they don't want to create another closed shop industry?
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I see little danger of this happening - if only as it's already happened.

As it stands, everyone looking for an accountant's services will look at his/her quals either online or on the brass plate or shingle outside the office. If the practice of accounting services is closed to those without appropriate quals, then I think most responsible folk would say that's as it should be.

Is it the normalization of fees across the board for accounting services that you are worried about ? Solicitors and barristers seem to get around this "set fee" stuff all right when they want to.
 
I'm not remotely worried about anything. If they tomorrow restricted the for-profit provision of accounting and tax return services to those holding appropriate qualifications and subjected to professional-level regulation, I'd make a killing.

The Institutes have been lobbying for years for this but the State doesn't want to know. All I've done here is speculate why.

You say that the creation of a closed-shop accounting industry has " already happened" while you acknowledge that literally anyone can set themselves up as an accountant and provide services to the public on that basis.

Those two statements cannot simultaneously be true.
 
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