England and Wales: the auditor's role and financial assistance

Section 151 of the Companies Act (1985) makes it is unlawful for a company to provide financial assistance for the purchase of its own shares.  Private companies can, however, provide financial assistance by complying with the so-called "whitewash" procedure.  This requires directors to make a solvency declaration (or statement) in accordance with Section 156. Atttached to this must be a report by the company's auditors stating that they have enquired into the company's affairs and that they are not aware of anything to indicate that the directors' opinion is unreasonable in all the circumstances.

The nature of the auditor's role in respect of this report has recently been considered in M&S Tarpaulins Ltd. v Green (Ch.D., Manchester, 2 May) (not yet available on BAILII). The trial judge: (a) held an auditor negligent in the preparation of the report (the auditor had failed, inter alia, to analyse the company's cash flow position) and (b) rejected the claim that the questions to be asked and the techniques to be used in preparing the report would vary depending on the size of the transaction.

The decision is, however, of wider interest because of the endorsement given to the Auditor's Code within the ICAEW's Audit Quality document and the way in which the Code was used by the trial judge to consider the auditor's role and responsibilities. The trial judge cited several Code provisions including:

Rigour

Auditors approach their work with thoroughness and with an attitude of professional scepticism. They assess critically the information and explanations obtained in the course of their work and such additional evidence as they consider necessary for the purposes of their audit

NB: Change is afoot: Part 18 of the Companies Act (2006) introduces a new regime, effective from 1 October 2008, under which it will no longer be unlawful for private companies to provide financial assistance. For further information, see here.