| A19-4. | Where the auditor becomes aware of a suspected or actual instance of non-compliance with law or regulations which does not give rise to a statutory duty to report to an appropriate authority the auditor considers whether the matter may be one that ought to be reported to a proper authority in the public interest and, where this is the case, except in the circumstances covered in paragraph A19–6 below, discusses the matter with those charged with governance, including any audit committee11c. |
| A19-5. | If, having considered any views expressed on behalf of the entity and in the light of any legal advice obtained, the auditor concludes that the matter ought to be reported to an appropriate authority in the public interest, the auditor notifies those charged with governance in writing of the view and, if the entity does not voluntarily do so itself or is unable to provide evidence that the matter has been reported, the auditor reports it. |
| A19-6. | The auditor reports a matter direct to a proper authority in the public interest and without discussing the matter with the entity if the auditor concludes that the suspected or actual instance of non-compliance has caused the auditor no longer to have confidence in the integrity of the those charged with governance. |
| A19-7. | Examples of circumstances which may cause the auditor no longer to have confidence in the integrity of those charged with governance include situations: |
| Where the auditor suspects or has evidence of the involvement or intended involvement of those charged with governance in possible non-compliance with law or regulations which could have a material effect on the financial statements; or |
| Where the auditor is aware that those charged with governance are aware of such non-compliance and, contrary to regulatory requirements or the public interest, have not reported it to a proper authority within a reasonable period. In such a case, if the auditor determines that continued holding of office is untenable or the auditor is removed from office by the client, the auditor will be mindful of the auditor's reporting duties11d. |
| A19-8. | Determination of where the balance of public interest lies requires careful consideration. An auditor whose suspicions have been aroused uses professional judgment to determine whether the auditor's misgivings justify the auditor in carrying the matter further or are too insubstantial to deserve reporting. The auditor is protected from the risk of liability for breach of confidence or defamation provided that: |
| In the case of breach of confidence, disclosure is made in the public interest, and such disclosure is made to an appropriate body or person11e, and there is no malice motivating the disclosure; and |
| In the case of defamation disclosure is made in the auditor's capacity as auditor of the entity concerned, and there is no malice motivating the disclosure. |
| In addition, the auditor is protected from such risks where the auditor is expressly permitted or required by legislation to disclose information11f. |
| A19-9. | 'Public interest' is a concept that is not capable of general definition. Each situation must be considered individually. In the UK, legal precedent indicates that matters to be taken into account when considering whether disclosure is justified in the public interest may include: |
| The extent to which the suspected or actual non-compliance with law or regulations is likely to affect members of the public; |
| Whether those charged with governance have rectified the matter or are taking, or are likely to take, effective corrective action; |
| The extent to which non-disclosure is likely to enable the suspected or actual non-compliance with law or regulations to recur with impunity; |
| The gravity of the matter; |
| Whether there is a general ethos within the entity of disregarding law or regulations; and |
| The weight of evidence and the degree of the auditor's suspicion that there has been an instance of non-compliance with law or regulations. |
| A19-10. | An auditor who can demonstrate having acted reasonably and in good faith in informing an authority of a breach of law or regulations which the auditor thinks has been committed would not be held by the court to be in breach of duty to the client even if, an investigation or prosecution having occurred, it were found that there had been no offence. |
| A19-11. | The auditor needs to remember that the auditor's decision as to whether to report, and if so to whom, may be called into question at a future date, for example on the basis of: |
| What the auditor knew at the time; |
| What the auditor ought to have known in the course of the audit; |
| What the auditor ought to have concluded; and |
| What the auditor ought to have done. |
| The auditor may also wish to consider the possible consequences if financial loss is occasioned by non-compliance with law or regulations which the auditor suspects (or ought to suspect) has occurred but decided not to report. |
| A19-12. | The auditor may need to take legal advice before making a decision on whether the matter needs to be reported to a proper authority in the public interest. |
| 11c In rare circumstances, according to common law, disclosure might also be justified in the public interest where there is no instance of non-compliance with law or regulations, e.g. where the public is being misled or their financial interests are being damaged; where a miscarriage of justice has occurred; where the health and safety of members of the public or the environment is being endangered – although such events may well constitute breaches of law or regulation. |
| 11d In the UK, under Part 16 of the Companies Act 2006. |
| 11e In the UK, proper authorities could include the Serious Fraud Office, the Crown Prosecution Service, police forces, the Financial Services Authority the Panel on Takeovers and Mergers, the Society of Lloyd's, local authorities, the Charity Commissioners for England and Wales, the Scottish Office For Scottish Charities, HM Revenue and Customs, the Department of Business Innovation and Skills and the Health and Safety Executive. |
| In Ireland, comparable bodies could include the Garda Bureau of Fraud Investigation, the Revenue Commissioners, the Irish Stock Exchange, the Irish Financial Services Regulatory Authority, the Pensions Board, the Director of Corporate Enforcement, the Health and Safety Authority, The Charities Regulatory Authority and the Department of Enterprise Trade and Employment. |
| 11f In the UK, the Employments Rights Act 1996 would give similar protection to an individual member of the audit engagement team who made an appropriate report in the public interest. However, ordinarily a member of the engagement team who believed there was a reportable matter would follow the audit firm's policies and procedures to address such matters. ISA (UK and Ireland) 220, "Quality Control for an Audit of Financial Statements," paragraph 18(a), requires that the engagement partner shall take responsibility for the engagement team undertaking appropriate consultation on difficult or contentious matters. If differences of opinion arise within the engagement team, ISA (UK and Ireland) 220, paragraph 22, requires that the engagement team shall follow the firm's policies and procedures for dealing with and resolving differences of opinion. |
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