LEGAL PERSPECTIVE:
The law gives the external auditors of companies many powers and jurisdictions including the right to call the shareholders of the company for an ordinary general assembly, under certain circumstances.
This important power which has been given by the law to the external auditors of the company indicates that the law recognizes the significance of the sensitive role 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.
Here appears some difference or distinction between the external auditors and the internal auditors in the company. Why this distinction happens?
On the face of it, I would like to say that the auditing principles for all auditors, being external or internal, are almost and should be the same. However, the auditing rules to be followed by the internal auditors are , we could say , local rules issued by the management of the concerned company primarily for checking and cross-checking the accounts & related figures of the company .
The internal auditors, moreover, are employees of the company and are supposed to report to the executive management of the company on daily basis. This situation may but the internal auditors in a difficult confrontation with their superiors in the company, in case they report to any party outside or other than the executive management of the company.
Whereas, on the other hand, the external auditors are totally independent from the executive management of the company i.e. there is no managerial supervision or link. The external auditors are, according to the terms of the law, appointed by the shareholders of the company and they are normally chosen from qualified auditing firms applying for the auditing job.
The external auditors, as clear from above statement, are not part of the management staff of the company and accordingly the internal rules and disciplinary regulations are not applicable on them.
The external auditors, being appointed by the shareholders, are primarily supposed to report to them. And the shareholders are supposed to decide on all issues related to the amount and limit of remuneration to be given to the external auditors in consideration for their auditing work according to the terms of the contract signed with them. In case the external auditors commit any mistakes they will be responsible and legally accountable according to the terms of the contract.
As a rule, also, the external auditors are supposed to follow and apply the international auditing standards (IDS) and the professional ethics and codes of conduct.
This shows that the duty of the external auditors is not just checking or auditing of accounts, but it goes more than that, because they are empowered to check the policies and strategies of the company and to give their views and recommendations whenever they deem necessary.
I think the law gave 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 and corporate governance norms.
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.
There should be no war, hidden or unhidden, between the management of the company and the external auditors. 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 that, in some cases, the external auditors are obliged to report what they deem as serious matters and or findings to the concerned official government institutions, a good example for this is the Central Bank. In this respect the law authorizes and requires that the external auditors appointed to audit licensed banks, shall immediately report 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, i.e. the Central Bank, to take all proper, prompt and appropriate actions.
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 and special protection to depositors and the banking industry in general.
A legal question may arise here, what about the privity of contract between the licensed bank 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 could direct all licensed banks to insert a clause in each contract, entered into with the external auditors, which provides that the external auditor shall report certain matters to the Central Bank. This means the contractual relationship with the licensed banks gives the external auditors the right to report whatever required and / or they deem necessary to the Central Bank.
The above points highlight some of the important roles undertaken by the external auditors based on the legal jurisdiction given to them by the law.
Dr . AbdelGadir Warsama Ghalib
Founder & Principal Legal Counsel
Dr.AbdelGadir Warsama Consultancy
E-mail : awarsama@warsamalc.com
