Compliance and Accountability of Auditors

Auditors play a vital role in ensuring the transparency and integrity of companies. Shareholders entrust auditors to safeguard their interests and accurately report the company’s financial statements and internal controls.

This article will briefly outline the obligations and rights of auditors, shedding light on the general provisions of the Commercial Companies Law No. 21 of 2001, as amended (the “CCL”) and the common ground between Bahrain Shareholding Companies (“BSC”) and Partnerships Limited by Shares (“PLS”).

Auditors’ Obligations

The general objective of auditors is to perform an independent assessment of the company’s performance, through which the shareholders will significantly depend on their findings for decisions. Therefore, in addition to the External Auditor’s Law No. 15 of 2021, the CCL lists general reporting requirements and obligations.

Auditors of a BSC and PLS must attend general assembly meetings of the company and discuss the audit report with the shareholders. The audit report prepared must adhere to international auditing standards, and the CCL lists the main components as follows:

  1. Whether the auditors obtained the information necessary to perform the audit.
  2. Whether there are discrepancies between the balance sheet and the profit and loss account.
  3. Whether the balance sheet and the profit and loss account were prepared in accordance with international accounting standards, or the standards approved by the authorities.
  4. Whether the balance sheet and profit and loss account reflect the actual financial position of the company.
  5. Whether the company maintained regular accounts.
  6. Whether the company’s inventory was conducted in accordance with the recognized standards.
  7. Whether the Board of Directors’ report is in conformity with the information contained in the company’s books.
  8. Whether there are violations of the company’s Articles of Association or the provisions of law.

Furthermore, the auditors must provide the Ministry of Industry and Commerce (“MOIC”) with copies of the report and advise whether there are any violations or breaches of any nature.

Auditors’ Rights

The rights stipulated under the CCL empower auditors to fulfill their obligations with little to no hinderances from the company. Audit reports must be transparent regarding company violations; therefore, it is essential to authorize auditors and empower them to take action against the Board of Directors and the company’s employees if there is a lack of cooperation.

Considering the extensive obligations mentioned above, the CCL empowers auditors to access all the company’s books, registers and documents in order to fulfill their auditing duties. The auditors may ask for particular information or documentation necessary for the preparation of the audit report, whereby the CCL grants auditors the right to verify the company’s assets and liabilities.

If the company’s employees do not enable the auditors to exercise their rights under the law, the auditors may submit to the Board of Directors a report, through which the Board of Directors must facilitate the auditors’ tasks. If the Board of Directors is not cooperative, the auditors may invite the ordinary general assembly to decide on the matter.

Conflict of Interest

Auditors are appointed due to their independence and impartiality, which are crucial aspects to an accurate audit report. The CCL emphasizes the prohibition of appointing an auditor who is in conflict with the company and specifies the instances where a conflict of interest is present.

In accordance with the CCL, the appointed auditors must not be conflicted with the by holding the following positions:

  1. Chairperson of the Board of Directors.
  2. Member of the Board of Directors.
  3. Managing Director.
  4. Any administrative position.
  5. Any supervisory position of the company’s accounts.

Moreover, the auditors may not be appointed if they have a relative (up to the second degree) that supervises the company’s accounts. During the auditing period, the auditors are prohibited from purchasing or selling shares of the company. This is to ensure that there is no insider trading considering that the auditor is privy to sensitive information during the audit period.

Auditors’ Liability

Due to the critical and sensitive nature of audit reports, the auditors are answerable for the accuracy of any information contained therein and may be liable to the company for damages sustained as a result of the inaccuracies of their reports. In the event there are multiple auditors who jointly participated in the inaccurate report, the auditors will be jointly liable to the company.

The statute of limitations regarding the liability of auditors is one year from the date of the general assembly meeting during which the auditor’s report was discussed. In the circumstance that the violation of the auditors was considered a criminal act, the claim against the auditors will not be heard before the judgment of the criminal case is issued.

Auditors’ liability may result in the right to compensation to shareholders and third parties as a result of non-compliance with accounting principles and standards, or professional wrongdoing.

In conclusion, to diligently examine company documents, financial statements and internal controls, an unbiased assessment is possible through the enforcement of the obligations, rights and liabilities of auditors as stipulated by law. The CCL governs auditors’ integrity, compliance and accountability to ensure that those characteristics are reflected in audit reports.

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