The London and General
Bank case combined with the Kingston Cotton Mill case form the cornerstone
according to which present-day auditing standards are formulated. As the
English law is governed by ‘stare decisis’, meaning that past precedents serve
as foundation upon which consequent judgements are delivered, this case is of
In this case the
company had taken credit for interest accrued on loans which were never likely
to be repaid. Many of these loans were statute barred (i.e. uncollectable). The
auditor was aware of the problem and reported only to the directors and not to
the shareholders. Subsequently the financial statements did not show a true and
fair view. In summing up, the judge stated that the auditor had a duty to
shareholders to report any dishonest acts that had occurred. He said the
auditor could not expect to find every error but had a duty to use due care and
Moving on to the
distinct viewpoints that emerged after the final verdict had been given.
The first viewpoint is of
Justice Lindley had opined that the role of an advisor to the management does
not come under ambit of duties to be discharged by the auditor. Moreover, he
also observed that an auditor should not concern himself with the fore-thought
with which the business is being conducted. More so, the auditor is ideally
restricted from taking up the aforesaid roles.
The primary duty of an
auditor is to examine the books of accounts and ascertain that they show the
true financial position of the company. The above duty he must discharge by
exercising reasonable skill and care. Reasonable care can be defined as the
circumstances which excite suspicion. However, if grey areas do arise, the
auditor must exercise outmost care and if necessary must seek the opinion of a
specialised expert. Further, a distinction was also made between ‘information’
and ‘means of information’. An auditor must provide the shareholders with
‘express information’ and not ‘means of information’ failing which the auditor
makes himself liable to judicial proceedings. In doing so, the auditor
concerned does not take over the role of an ‘insurer’, thereby insuring the
credibility of the books of accounts.
Justice Lindely held
that the words of the balance sheet were ‘unusual’ and more than enough to
The second viewpoint is
of Justice Rigby which enumerated on the aspect of ‘Articles of Association’
and the obligations they impose on the auditors. Justice Rigby propounded that
the words ‘as shown by the books of the company’ are deceiving in the manner
that they give an illusion of auditor being discharged from his responsibility.
He also observed that a ‘full and fair’ Balance Sheet is one which depicts the
truthful position and must not veil any malady in the organisation.
Mr.Theobald, the auditor in this case did fail
to discharge his duty in professional capacity, as he was unable to convey and
sight any wrongdoings. He was ordered to pay in to the company’s funds the
amount of one of the dividends wrongfully paid, together with interest.