LEGAL VIEWPOINT: Role of external auditors in public companies

By Dr AbdelGadir Warsama, Legal Counsel

Dr AbdelGadir Warsama, Legal Counsel
Asia 728x90

According to the provisions of The Commercial Companies Law in Bahrain, the external auditors of public-joint-stock companies have got the necessary jurisdiction to call the shareholders of the company for an ordinary general assembly. This important power has been given by The Commercial Companies Law to the external auditors of the company to enhance their role and, no doubt, this indicates that the Legislature recognizes the significance of the duty and burdens to be undertaken by the external auditors of any company.

However, we need to mention that, this power is given by the law to the external auditors only. In other words, internal auditors cannot call the shareholders of the company, simply because the law does not give them such legal authority, as they are employees of the company.

On the other hand, external auditors are not employees of the company and totally independent from the management as there is no managerial supervision. External auditors, according to the terms of the Commercial Companies Law, are appointed by the shareholders of the company from qualified auditing firms applying for the job. External auditors, being appointed by the shareholders, are supposed to report to them and the shareholders normally, on recommendations from the Board, decide the appointment, amount of remuneration to be given to the external auditors in consideration for their auditing work.

As a rule, the external auditors are supposed to follow and apply the international accounting / auditing standards (IAS) and the customary professional ethics and codes of conduct. Auditor’s firms, as we have recently seen, violating or breaching such norms are to blame themselves because they will be prosecuted and discarded.

As per the international standards, the duty of the external auditors is not just checking or auditing of accounts, but they are empowered to check the policies, procedures and strategies of the company and give their recommendations as they deem necessary.

I think the Commercial Companies Law gives the external auditors such a great role so as to enable them to assist in strengthening the system and structure of the company, to the benefit of the shareholders, within the accepted norms of auditing standards.

To achieve this goal the external auditors, in general, are not supposed to be looked at as enemies of the management or mistake-seekers. Their aim is to make sure that everything is in order and going in the right direction. Both parties are supposed to join forces for the betterment of the company in general and the shareholders in particular.

I would like to say here, in some cases, external auditors are obliged to report what they deem as serious matters / findings to the concerned official government institutions. A good example for this is the Central Bank or the Securities Market Authority. The law, for instance, authorizes and requires that external auditors appointed to audit licensed banks, shall report immediately serious violations and or malpractices of licensed banks to the Central Bank.This is due to the special nature of the work of licensed banks and to protect depositors who are supposed to have save haven for their deposits in banks. The purpose of this duty is to ring an alarm bell to enable the competent authority, to take prompt and appropriate action.

Of course, the Central Bank has got its own ways and means to observe the proper performance of banks and to keep a vigilant eye on what they are doing. However, this should be considered as an additional eye and mind to give more protection to the banking industry.

A legal question may arise here, what about the “privity of contract” between banks and the external auditors? How come they report to an alien or a third party to the contract? In reply, I would like to say that the Central Bank is not an alien because it is the licensing and supervisory authority over banks. Moreover, the Central Bank directs all banks to insert a clause in each contract with external auditors providing that external auditor shall report certain matters to the Central Bank. This means the contractual relationship with the bank gives the external auditors the right to report whatever required and or they deem necessary to the Central Bank (other competent authorities).

Above shows that external auditors of public companies are given an important role to enable the corporate business to develop in a clean and healthy environment for all.