Re London and General Bank (No 2)

Facts

• The London and General Bank made advances on inadequate security; many loans became irrecoverable.
• The auditor discovered the precarious state of the loans but merely communicated his concerns privately to the directors.
• The auditor did not qualify his report to the shareholders nor disclose the true position of the bank's assets.
• The bank collapsed and creditors suffered losses.
• The auditor was charged with negligence for failing to report to shareholders.

Issue

1. Whether an auditor discharges his duty by merely reporting irregularities to the directors, or whether he is obliged to bring material matters to the attention of shareholders through his report.

Held

• The Court of Appeal held that the auditor had failed in his duty. Lindley LJ established that an auditor's duty is owed to the shareholders as a body, and he must convey to them, through his report, any information material to their understanding of the company's financial position. Private communication to directors does not discharge this obligation.

Ratio Decidendi

An auditor acts as the agent of the shareholders, not the directors. His duty is to report to the shareholders on the accounts laid before them and to provide them with the information they need to exercise their rights. Where the auditor discovers matters that shareholders ought to know, such as the precarious value of assets, imprudent management, or irregularities, he must bring these to their attention in his report. Merely telling the directors is insufficient; the shareholders are the principals to whom the auditor is answerable.