The Legal Regime of Auditors According to the Company Legislation in
Bashar H. Malkawi*
Financial statements of companies constitute a major source of information for the public and investors particularly. In large part, investment decisions are based on financial statements which must be reliable. If company financial statements cannot be trusted, investors are victimized. An auditor, through his professional opinion, plays an important role in validating financial statements. The auditor examines what is stated in company's books and records and prepares a report which summarizes his conclusions regarding the financial standing of a company. In addition, the auditor may propose solutions for weaknesses in company's finance and assist management in increasing production capacity of the company.
Due to the significance role an auditor plays in the company's affairs, the Jordanian legislator enacted several provisions in order to organize the auditor's rights and duties. The legislator carved out a special section in the Company Legislation No. 22 of 1997 to deal with matters such as election of an auditor, contents of auditor's report, attendance of the general assembly meetings, and prohibitions.
The purpose of this article is to assess the legal regime of auditors as provided in the Company Legislation of 1997. The article starts by providing an overview of the development of the auditing profession in
Then, the article analyzes in detail the specific provisions related to
auditors in the Company Legislation of 1997. Finally, the article concludes by
arguing that many provisions that relate to auditors lack precision and there
is inconsistency between rights and duties of auditors as provided in the Company
Legislation and other relevant legislations and regulations.
II. Development of the Auditing Profession in
Regulation of the audit profession in
is relatively recent. In 1961, audit practice was unorganized and practitioners
were not required to satisfy any level of academic knowledge or work
means that any person is eligible to practice. The first audit law was enacted
in 1961 and presented certain conditions that had to be fulfilled by an
individual licensed to practice audit. However, the Law of Practicing the
Auditing Profession No. 10 of 1961 permitted licensing of individuals
possessing intermediate school certificates and six years of experience. The
Law of Practicing the Auditing Profession No. 10 of 1961 also did not fully
specify prohibited activities for an auditor and duties and rights of an
sum, the Law of Practicing the Auditing Profession No. 10 of 1961 provided lax
conditions for practicing auditing.
Given the economic developments in Jordan and establishment of public shareholding companies in record numbers, there was a need for an audit law that provides a better organization of the profession. This led to the issuance of the Law of the Audit Profession No. 32 of 1985. The Law revised the provisions concerning qualifications and required that in order to be licensed the auditor must possess at least a community college degree in accounting and must set for an exam administered by the Audit Profession Council. The Audit Profession Council has the right to supervise the audit profession. The 1985 Law specified ten acts that are prohibited to do by auditors. These acts include unethical advertising, disclosure of clients' information, and deliberately giving wrong opinions on financial statements.
In 2003, a new law was enacted to streamline the governance of the audit profession. The Provisional Law on Organizing the Audit Profession No. 73 of 2003 provides for the formation of a supervisory authority, known as the Audit Profession Association, similar to the existing one under the 1985 Law. However, the Audit Profession Association includes both auditors and accountants. The Audit Profession Association monitors the performance of auditors and accountants to ensure their compliance with laws and accounting and auditing standards. The Provisional Law on Organizing the Audit Profession No. 73 of 2003 increased the level of qualification needed for practicing auditing including a requirement of training. Further, the Provisional Law on Organizing the Audit Profession No. 73 of 2003 requires several entities, such as partnerships and corporations, to appoint licensed auditors. The mandatory appointment for these entities will provide additional working opportunities for auditors.
The Provisional Law on Organizing the Audit Profession No. 73 of 2003 and its implementing regulation classifies licensed auditors into categories. The Provisional Law of 2003 designates category A for the highest qualified auditors i.e. those with the highest academic qualifications and experiences. Auditors in category A can audit any company or establishment. Auditors in categories B and C can only audit specified institutions. For example, auditors in categories B and C cannot audit banks, insurance companies, or industrial companies. The Provisional Law of 2003 and its implementing regulation provide guidelines for promoting auditors to higher categories. The classification of auditors into categories may prove irrelevant as the majority of auditors can be classified into category A. Moreover, on average, promotion from category B or C to category A can be accomplished in one year or less.
The representation of auditors by an association rather than a union may show that the government assigns it a low level of importance compared to other professions. For instance, attorneys in
have a union since 1950s.
Unions have worked to improve the professions they represent by defending their
rights. The Provisional Law on Organizing the Audit Profession No. 73 of 2003
does not regulate some welfare matters such as minimum audit fees and social
The first audit office, George Khader's firm, opened in
in 1944. Saba & Co, a prominent Arab audit firm, established its branch
office in Jordan
in 1948. Since
then, the profession has begun to increase in size. At present, the number of
audit firms and offices amounts to 190 approximately including firms affiliated
with the Big Four and some other international firms.
International linked firms, especially these linked with Deloitte Touche
Tohamtsu, dominate the market for auditing banks and insurance companies, and
have a considerable share of the audit market for other corporations.
International companies operating in Jordan
must have their branches audited by Jordanian licensed auditors.
III. Regulation of Auditors in the Company Legislation
The regulation of auditors in a given country is related to that country's legal system. In
Jordan, like other code law countries, laws stipulate minimum
requirements and rules tend to be highly prescriptive and procedural.
The degree to which rules are legislated can impact the nature of the auditing
The Company Law No. 22 of 1997 is considered a major source for regulating auditors. In addition to regulating general matters related to companies, the Company Law governs auditors. For example, the issues of auditors' election, remuneration, report, and liability are dealt with in the Company Law. This part of the article considers these issues in details.
A. Election of Auditors
The Company Law No. 22 of 1997 specified which companies should appoint an auditor. These companies include public shareholding company, limited liability company, and private shareholding company. The Company Law excluded from the list general and limited partnerships and mahassa company (silent company). There is no obvious reason why the Jordanian legislator excluded partnerships and mahassa company from those companies whom their financial statements must be externally audited. It can be presumed that partnerships and mahassa company are generally small or medium-size companies and their nature do not merit appointment of auditors as they may not maintain organized commercial books. However, these reasons do no justify exclusion from appointing auditors especially knowing that auditors play an important role in verifying financial reports which are crucial for third parties who deal with companies. Hence, the Company Law should be amended so as to oblige all types of companies to appoint auditors and have their financial statements audited.
Management of the company nominates auditor(s) among those authorized to practice in
The general meeting of shareholders then votes in favor of or against that auditor. The
right of shareholders to elect an auditor is rarely exercised. In reality, the general meeting
of shareholders rubbers stamps the decision of selecting an auditor which has
already been made by management. So, the process of selecting an auditor can
best be described as "appointment" rather than true election. A
further issue that arises is the fact that the majority of Jordanian companies
have concentrated ownership. The
election of auditors
by the shareholders general meeting allows the controlling shareholder of a
company to have the final word on the matter.
The Company Law did not include specific qualifications, whether academic or professional, for auditors. Rather, the matter of qualifications is referred to the Provisional Law on Organizing the Audit Profession No. 73 of 2003. Auditors are appointed for one year renewable. However, the Company Law does not determine if the one-year period is renewable once or more and for how long. Moreover, the Company Law lacks provisions on the right to dismiss an auditor. It can be argued, though, that the general meeting of shareholders has the right to dismiss an auditor since it is the authority which elected him. In other words, an auditor should be dismissed in the same manner in which he was elected. Thus, if the auditor was elected by the general meeting of shareholders, he would be dismissed by the general meeting of shareholders.
If the general meeting of shareholders fails to elect an auditor, then the board of directors shall nominate to the Companies Controller of the Ministry of Industry and Trade three auditors at least. In this instance, the Company Law refers the matter to the Companies Controller considering the fact that it is the umbrella entity responsible for monitoring and regulating companies in
However, before referring the matter to the Companies Controller, the Company
Law should have given the right to elect an auditor to the extraordinary
meeting of shareholders. If the extraordinary meeting of shareholders fails to elect
an auditor, the Companies Controllers would then intervene.
In addition to company auditors, audit committees play an important role in accounting matters. Audit committees of corporate boards of directors are central to corporate governance in many countries. Audit committees oversee, among other things, the financial reporting process which is important to promote reliable financial statements. Thus, Audit committees protect investors and other stakeholders by aiding in deterring, detecting, and preventing fraudulent financial reporting. At present, there is no such mechanism in
The Company Law of 1997
should be revised to allow companies to establish an audit committee.
Remuneration of auditor is determined either by the general meeting of shareholders or board of directors. Audit remuneration in
is regarded low especially if compared with other countries. For example, audit
remuneration for public shareholding companies stands at JD 1500 (equivalent to
US $2116). Arguably,
managers of companies do not appreciate or value the role of auditing and
perceive auditing as a service that does not provide tangible value. The low
level of auditor's remuneration may adversely affect his performance since he
may not be able to meet all required duties at such a remuneration level.
Further regulations should set a minimum level of auditor's remuneration commensurate
with his duties and risks.
The auditor must be objective in reviewing financial statements. To be objective, the auditor must maintain his independence. The Company Law of 1997 does not define the term "independence." Rather, the Company Law states the kinds of relationships and activities that create conflict of interest and could cause the auditor to jeopardize his independence.
The Company Law prohibits an auditor from participating in the establishment of a public shareholding company. For instance, an auditor could be prohibited from acting as a promoter or underwriter. The Company Law also prohibits an auditor from being a member of a company's board of directors, partner to any member of board of directors, or employee of any board member. These prohibitions are designed to disconnect the auditor from any financial interest whatsoever in the company.
Over the years, auditing firms have come to offer many types of services to their audit clients. Now, the ability of auditing firms to perform such services is limited. The Company Law prevents an auditor from providing "permanently" any technical, administrative or consultancy services to a company whose accounts he audits. In other words, an auditor is not permitted to engage in non-audit services. Non-audit services include, for example, financial consulting, pension services, and marketing services. These services may be unsuitable for the role of auditors. Additionally, by providing non-audit services, companies can exercise leverage over auditing firms to influence their opinions on the financial statements. Therefore, any non-audit service provided to clients will violate the Company Law prohibition. However, the Company Law limits the prohibition to "permanent" delivery of non-audit services. Thus, "temporary" or "circumstantial" delivery of non-audit services may be permitted. The Company Law should have prohibited the delivery of non-audit services without distinction between permanent and temporary because both have the same undesired effects.
The language of independence rules found in the Company Law of 1997 is general and in some cases even ambiguous. For example, the Company Law does not define with sufficient clarity the term "participation" in the establishment of a company which would prohibit an auditor from delivering his services to this company. Do any of the prohibitions against an auditor extend to his immediate family? Because there is no guidance, interested parties may have difficulty applying the existing independence rules to the large number of circumstances they would face. Moreover, the Company Law refers to absolute prohibition when listing its independence rules. The Company Law should permit certain activities but restricting their extent or permit certain activities but requiring the auditor to disclose information about them.
No Judicial decision exists in which an auditor's independence was an important issue. An auditor's independence from his client is one of the hallmarks of modern corporate law. Due to the non-existence of judicial cases that address auditor independence, courts have not had the opportunity to act as policymakers in this area. Thus, the Jordanian legislator ought to modernize independence rules of the Company Law to be more finely tuned.
C. Duties of Auditors
Although the auditor comes to the company as a contractor under a contract, he assumes a responsibility transcending any employment relationship. The auditor is an agent for shareholders whose interests he is charged to protect. The relationship between auditors and shareholders is a classic agent-principal issue. Thus, the auditor-agent owes duties to the shareholder-principal. The Company Law articulates several duties for an auditor.
The Company Law of 1997 first enumerates a list of specific duties that are required by auditors. An auditor is responsible for monitoring the company's activities. The statement "monitoring the company's activities" is quite general and ambiguous since monitoring the activities of the company can include many issues an auditor cannot be reasonably asked to perform such as verifying efficiency in managing the company's affairs. Further, the duty of an auditor to monitor the activities of the company is not backed by any auditing standard.
An auditor is also required to audit company's accounts according to recognized auditing, scientific, and technical standards. As for standards of auditing and accounting, the Company Law of 1997 provided a relatively better definition compared to the previous law of 1989. The Company Law of 1997 states that those standards are the accounting and auditing principles agreed upon internationally and required in
Jordan by the designated professional parties. The Company Law of
1997 does not define these designated professional parties mentioned in the law.
However, arguably, professional parties include the Audit Profession
An auditor is required to examine company's internal financial controls to ensure their suitability with regard to the company's business and safeguard its assets. Although the term "examining internal financial controls" is to some extent general and undefined, it is a common responsibility of auditors and conforms to International Standards on Auditing. Among other duties, the auditor is mandated to verify the company's assets, its ownership, and ascertain the legality and correctness of the company's obligations. This duty is considered an important criterion that can used to gauge the status of the company and ascertain ownership of the company and its value. However, the Company Law is short on details regarding the auditor's duty to verify the company's assets.
Power of the company auditor is expanded to cover management affairs. The auditor is required to examine decisions of the board of directors and the general meeting of shareholders. For example, an auditor could examine a decision to purchase or sell to ensure that such financial transactions are done in a legal manner. The list of auditor's duties ends in a "catch-all" phrase. The auditor may perform any other duties as required by other laws. The "catch-all" phrase empowers the respective regulatory body to expand duties of an auditor as it sees fit.
Although article 193 of the Company Law of 1997 is supposedly to list all duties of auditor, articles 202 and 203 provide for additional duties. Taken together, these articles form the "do's and don'ts" rules for auditors. In other words, the list of duties included in article 193 is drafted in a positive form. For example, auditors are responsible for monitoring company's performance, auditing its accounts, ensuring that its books were kept in a proper manner. On the other hand, articles 202 and 203 are drafted in the negative. For example, auditors are prohibited from disclosing information or speculating on client's shares.
The auditor owes a duty of confidentiality. The auditor is prohibited from disclosing to shareholders and others any information that comes to his knowledge in the course of exercising his work. However, the duty of confidentiality does not apply when an auditor discovers fraud or any other violation of the laws. In the latter case, the auditor shall disclose these violations and report them to the appropriate authorities. In sum, the duty of confidentiality is not absolute but rather subsides when it conflicts with the interest of shareholders and others in obtaining crucial information.
Other new responsibilities of auditors under the Company Law of 1997 include a prohibition on speculation. This duty is to be added to previous one of confidentiality. Due to the nature of his work, an auditor knows the nuts and bolts of the company he audits its account. The auditor can easily speculate on the company's shares to gain the profit. Thus, to avoid speculation, the Company Law expressly prohibits an auditor from speculating on client's shares. However, the Company Law limits the scope of prohibition by referring to shares only. The Company Law should have widened the scope of prohibition to include shares and debentures. Moreover, the Company Law limited the prohibition on speculation in the shares of the company that the auditor audits its account. The Company Law does not extend the prohibition to include subsidiary companies.
The company whom accounts are being audited must facilitate the job of the auditor. For instance, the company in question must furnish documentation if requested by the auditor. A new feature of the Company Law of 1997 is that an auditor, if unable to perform his or her duties, is to withdraw from the audit engagement and write about that to the board of directors and the Companies Controller. The Companies Controller is to discuss the issues with the board of directors and, if unable to solve the problems, can disclose that to a general meeting of shareholders if deemed necessary.
D. Auditor's Report and its Content
The origin of the modern auditor's report can be traced to late nineteenth century British audit reporting practices. The purpose of auditor's report is to evaluate a company's financial information and state auditor's opinion on the balance sheet and profits and losses account. Auditors are required to present a report to the general meeting of shareholders. The Company Law of 1997 sets forth mandatory information that must be included in the auditor's report.
In the auditor's report, the auditor must include a statement that the company's management and board of directors provided him with information or statements he requested and facilitated his audit. The auditor should provide this statement whether or not he obtained the necessary information and clarifications. The Jordanian legislator could have required the auditor to provide this statement only if he does not obtain the needed information. Thus, the auditor would not be required to supply this statement if he obtained the information. However, the Jordanian legislator opted to require the auditor supply this statement whether he obtained the information or not.
The auditor, in his report, is required to disclose if the company maintains accounts, the extent to which financial statements are prepared according to internationally accepted accounting and auditing standards, and the company's financial statements confirmed with its books. Again, the auditor should provide this information whether or not the company maintained accounts or not. The Jordanian legislator could have required the auditor to disclose this information only if the company does not maintain accounts or its financial statements are not prepared according to internationally accepted accounting and auditing standards.
The auditor must state that auditing procedures carried out by him form, in his opinion, a reasonable basis to express his opinion regarding the company's financial position, and results of its operations and cash flow according to internationally accepted auditing standards. Hence, not only does the Company Law require the auditor to state that the auditing procedures form a reasonable basis to express his opinion, but also specifies the type of information and documents that this obligation applies to. These information and documents are the company's financial position, results of its operations, and cash flow statement.
The report has also to include an item stating that the financial statements found in the board of director's report to the general meeting of shareholders comply with the company's records and registers. Once again, the auditor must state this item in his report whether or not the financial statements comply with company's records and registers.
The auditor should report any violation of the Company Law of 1997 or the company's articles of association that is committed during the year and which has a material effect on the financial position of the company, and whether any such violation still exists. The auditor's report of any violation must be within the limits of the information available to him or that he should know by virtue of his professional duties.
This means that auditors are not required to detect violations. But if these violations are discovered in the course of the auditor's duty and within the limits of information available to him, the auditor then should report them as required by the law. In other words, the auditor cannot play the role of a detective and examine every suspicious case ex officio.
Not any violation of the Company Law of 1997 or the company's articles of associations should be reported. The auditor must report the violation that has "material effect" on the company's operations or its financial position. The Company Law of 1997 does not provide a definition of "material effect" or provide examples of violations that have material effects. Additionally, the Company Law does not require the auditor to immediately notify the board of directors or the Companies Controller if he discovers any violation that adversely affects the financial position of the company. To the contrary, any mention of violations must be made in the auditor's report.
In reporting violations, a question could arise with regard to the status of violations that are committed but fixed later. Is the auditor required to report these violations or not since they are dealt with? The Company Law of 1997 does not provide an express answer. However, by looking at the general language used in reporting violation, one can assume that any violation must be stated in the auditor's report whether this violation still exists or is dealt with.
After the audit is complete, the auditor issues an opinion regarding the company's balance sheet and profits and losses account. Now, the auditor can issue three opinions. First, the auditor can approve without reservation the balance sheet, profits and losses account, and cash flow. Second, the auditor approves with reservation the balance sheet, profits and losses account, and cash flow provided that he justifies his reservation. Third, the auditor does not approve the balance sheet, profits and losses account, and cash flow with a justification for this rejection. In the latter case, the auditor sends the financial statements to the board of directors whereby the general meeting of shareholders requires the board to correct these statements. If the board of directors refuses to make the necessary changes to bring financial statements into conformity, the matter will be referred to the Companies Controller who appoints licensed auditors to settle the issue.
The Company Law does not grant the auditor the right to issue an adverse opinion if he finds that financial statements do not show the company’s true financial position. The result, according to the Company Law of 1997, is that auditors can provide a total of three opinions: one opinion on balance sheet, one opinion on profits and losses account, and one opinion on cash flow. The three-opinion arrangement creates the possibility of different combinations of opinions. For example, these combinations may include the case of approval without reservation or non-approval on all or approval without reservation on balance sheet and non-approval of profits and losses account and cash flow.
There is no mention in the Company Law of the auditor's responsibility to attest to or certify the truthfulness of financial statements. The auditor does not opine on the accuracy of the financial report. Instead, the auditor opines that the financial statements "present fairly." The auditor's report is not a certification of a fact but an expression of opinion based on professional judgment. In other words, the auditor job is to express an opinion on the financial statements, which are the responsibility of the company's management, based on his audits. In sum, the audit report is not a guarantee. What supports this summation is the fact that audits do not evaluate all recorded transactions for a company. Audits are conducted by choosing a sample of transactions on a predetermined basis and determining if the sample chosen is properly recorded.
The public in
Jordan has been
more willing to question the quality of auditors' work. Questioning of
auditor's work is due to the gap between what auditors actually deliver and
what the public usually expects, known as the expectation gap.
This gap refers to a difference between auditors' understanding of their
function and investors' expectations of the auditor's role.
E. Attendance of the General Meeting of Shareholders
The Company Law compels the auditor to attend the general meeting of shareholders. Attendance of the auditor allows shareholders to discuss with him directly issues that arise from the financial statements of the company. In addition to the general meeting of shareholders, the law should allow shareholders to request a meeting with the auditor without the presence of board of directors or management. The purpose of such a meeting is to communicate with the auditor without any influence of the board of directors on the agenda of the meeting which may occur in the general meeting of shareholders. Meeting with the auditor in the absence of the board of directors can take place either before or after the general meeting of shareholders.
F. Liability of Auditors
Auditors are legally accountable for their work when it fails to satisfy applicable legal requirements. Applicable legal requirements generally derive from relevant auditing standards and various laws. Auditors can be sued by the company which they audit its accounts, shareholders, and users of financial statements. Users of financial statements include investors and banks that as a result of relying on the auditors' opinion will likely make poor investment decisions or extend credits. Violations of the Company Law carry compensatory damages and criminal penalties. However, the Company Law does not determine the level or range of damages and jail sentences.
If the company has more than one auditor who committed an illegal act or erred, then they are jointly liable. Under joint and several liability system, one auditor can be held liable for all damages in an action. The joint and several liability system seems unfair as one auditor can be held liable for all damages despite the fact that he committed insubstantial or marginal audit error.
A time limit is set for bringing a civil suit against an auditor. The length of the limitation period is three years starting on the date the company’s general shareholders meeting where the auditor’s report is read. The purpose of time limitation is to require diligent prosecution of claims, thus providing predictability and finality.
The liability language of the Company Law of 1997 suggests that the auditor has unlimited liability. Thus, an auditor can be sued for mere negligence. The liability of an auditor should be limited by raising the standard of culpability. For example, an auditor should be held liable if he acted with intent to deceive or committed grossly negligent conduct. Alternatively, an auditor’s responsibility could be limited in proportion to his fault. Proportional liability allocates fairly the liability between the company’s management and the auditor thus discouraging inflated claims and encouraging everyone to be aware of his responsibilities.
Regretfully, liability of auditors has been tested few times in Jordanian courts. Reliable estimates of actual penalties and verdicts against auditors are difficult to obtain. Due to this state of affairs in
it is reasonable expect that there are no provisions on auditor liability
contrast, Canada, the United
Kingdom, Australia, New
Zealand, and the United
States have a substantial increase in
The Company Law in Jordan
should specify the level of penalties and increase them to enhance the
credibility of the audit profession and reduce possible conspiracy between
auditors and management.
The integrity of financial information is vital to the operation of economy. The auditor plays an important role in vetting financial statements. Investors rely on the integrity of the auditor's opinion. If investors begin to believe that the financial statements of companies are not accurate, they would be less likely to undertake investment. This lack of faith and withholding of investments would eventually destroy the financial markets in a country.
The legislator in
enacted special provisions to corporate
auditors which govern issues such as election of an auditor, contents of
auditor's report, attendance of the general assembly meetings, and
prohibitions. Public shareholding company, limited liability company, and
private shareholding company must appoint auditors. The Company Law should
require all types of companies to appoint auditors.
The role of management in selecting an auditor could be contained. The general meeting of shareholders would be empowered to elect the company's auditor, as opposed to the current practice of just voting in favor of or against an auditor already chosen by management. Information about each possible auditor may be included in the proxy materials so that shareholders can make informed decisions. The right of the general meeting of shareholders must be transformed into a more meaningful right to elect. As there are provisions addressing election, there must other provisions that address dismissal of auditors. Currently, the Company Law lacks provisions on the right to dismiss an auditor. In adding provisions to the law regarding dismissal, reasons should be provided to justify the decision to dismiss an auditor. However, a balance that needs to be struck in election and dismissal. The company structure is based on delegation by the board to management of day-to-day control over company affairs. Allowing shareholders the exclusive right to elect and dismiss auditors encroaches on this power and may also lead to inefficiencies.
The principle of auditor's independence needs fine tuning from time to time. The language of independence rules found in the Company Law is general and even ambiguous. For example, the Company Law does not define with sufficient clarity the term "participation" in the establishment of a company which would prohibit an auditor from delivering his services to this company. Additionally, the Company Law prevents an auditor from providing "permanently" any technical, administrative or consultancy services to a company whose accounts he audits. Based on this language, "temporary" or "circumstantial" delivery of non-audit services may be permitted. The Company Law should have prohibited the delivery of non-audit services without distinction between permanent and temporary because both produce the same undesired effects.
The Company Law lists specific duties that are required by auditors. For instance, an auditor is required to monitor the company's activities. The duty to monitor company's activities is too general and since monitoring the activities of the company can include many issues an auditor cannot be reasonably asked to perform. The auditor is prohibited from speculating on shares of the company. The Company Law should have widened the scope of prohibition to include shares and debentures.
Auditors are required to deliver a report. The Company Law sets forth mandatory information that must be included in the auditor's report. The auditor should provide this statement whether or not he obtained the necessary information and clarifications. The Jordanian legislator could have required the auditor to provide this statement only if he does not obtain the needed information. Moreover, the auditor should report any violation of the Company Law or the company's articles of association that is committed during the year and which has a material effect on the company, and whether any such violation still exists. The Company Law does not provide a definition of "material effect." Material effect may include any act that presents a serious damage to the creditworthiness, reputation, or standing of the company in question.
After the audit work is complete, the auditor issues an opinion regarding the company's balance sheet and profits and losses account. The auditor job is to express an opinion on the financial statements based on his audits. The Company Law does not give the auditor the right to issue an adverse opinion if he finds that financial statements do not show the company’s true financial position.
Auditors are legally accountable for their work. There is lack of a comprehensive regulation on the important issue of auditors' liability. An adequate liability system should be put in place and should include dissuasive penalties and removal of the auditor from the audit register. The Jordanian law must ensure appropriate disclosure of penalties to the public. Moreover, all auditors should be subject to quality assurance system and code of ethics.
The current legal regime of auditors in
needs revision. Amendments must be taken to fill in the gaps existing in the
law. Attuned to these gaps, the legislator must enact appropriate rules. The
issues raised here would give the legislator the tools to do so. Good
regulatory reforms are likely to achieve the goal of corporate financial integrity and enhance
corporate performance. It remains to be seen what will emerge from any future
* Department of Law, Yarmouk University, LL.B. 1999; James E. Rogers College of Law, University of Arizona, LL.M. 2001; Washington College of Law, American University, S.J.D. 2005.
had its headline-grabbing corporate scandals involving companies and banks. One
corporate scandal involved Petra Bank which was Jordan’s
second bank. Due to poor auditing controls, Petra Bank collapsed and became one
of the biggest corporate
scandals in Jordan’s
history. See A Delicate State of Affairs,
The Economist (Oct. 4, 2003). Other cases involved four local banks. See Isam
Qadamani, White Revolution in Banks, Al-Rai Newspaper (July 2, 2007).
 Over the years, there have been charges that companies hide information and claims of fraud on the part of auditors. See M. Al-Basheer, The Non-Seriousness of the Regulatory Authorities Prevented Stopping Corruption and Failure of Companies, Al-Rai Newspaper (
Apr. 21, 2001).
 See N.S. Khouri, The Evolution of the Audit Profession in Jordan, Al-Iqtisadi Al-Urduni (The Jordanian Economist) 82-83 (1994).
 See K.A. Abdullah, The Audit Profession in
and Kuwait: A
Comparative Analytical Study, 9.2 Dirasat Journal 131-151 (1982).
 The Audit Profession Council is mainly government-dominated and consists of twelve members such as the chairman of the Accounting Bureau, head of the Income Tax Department, and governor of the Central Bank of
See Khouri, supra note 3, at 83. See also M. Al-Basheer, Regulations…Is
there Anyone to Respond!!!! Vol. 47 The Auditing Journal 1 (2001).
 See Provisional Law on Organizing the Audit Profession No. 73 of 2003, Office Gazette No. 4606 (June 16, 2003).
art. 8 & 9.
art. 22 & 28.
art. 26. See also Regulation for Classifying Auditors No. 30 of 1986, Official
Gazette No. 3389 (April 16, 1986).
 The guidelines include possessing additional university degree, additional experience, or professional qualification. See Provisional Law on Organizing the Audit Profession No. 73 of 2003, supra note 6, at art. 26.
 Category A requires a minimum of a first university degree in accounting and three years of experience in accounting and auditing.
 See Ahmed Saadah, The Evolution of the Accounting and Auditing Profession in
Vol. 29 The Auditing Journal 23-25 (1996).
 See Modar A. Abdullatif, The Role of Auditing in
An Empirical Study Expectations 85 (2003) (unpublished Ph.D dissertation, ) (on file with
author). The Big Four are: Deloitte & Touche LLP, Ernst & Young LLP,
KPMG LLP, and PriceWaterhouseCoopers LLP. University
 In common law countries, such as the
United States, laws establish limits beyond which it is illegal to
venture, and within those limits experimentation is encouraged. See Stephen
Salter & Timothy Doupnik, The Relationship between Legal Systems and
Accounting Practices: A Classification Exercise, 5 Advances Int'l. Acct. 3
(1992) (provides empirical support for the hypothesis that a legal system is a
significant predictor of auditing practices and concludes that a
dichotomization of accounting practices, procedures, and rules consistent with
the common law/code law classification of legal systems).
 Other laws relating to auditors include securities, banking, and insurance laws. See Provisional Securities Law No. 76 of 2002, Official Gazette No. 4579 (December 31, 2002). See Banking Law No. 28 of 2000, Official Gazette No. 4448, art. 60 (August 2000). See also Insurance Law No. 33 of 1999 as amended by Provisional Law No. 67 of 2002, Official Gazette No. 4572, art. 40 (November 17, 2002).
 See Company Law No. 22 of 1997 as amended by Provisional Law No. 17 of 2003, Official Gazette No. 4589, art. 192.a (March 16, 2003).
 Mahassa company is a type of company that neither acquires juristic personality nor partners acquire the quality of merchants. Third parties are unaware of the existence of mahassa company. Thus, third parties have recourse only against partners in the mahassa company with whom they have dealt so long as the existence of the company is undisclosed. If the mahassa company is disclosed to third parties, it is treated as a general partnership with respect to such third parties. See Michael J.T. McMillen, Islamic Shari'a-Compliant Project Finance: Collateral Security and Financing Structure Case Studies, 24 Fordham Int'l L.J. 1184, 1233 (2001).
 See Company Law No. 22 of 1997, supra note 19, art. 192.a
 See World Bank, Corporate Governance Country Assessment: Jordan 1-2 (2004), available at
< http://www.worldbank.org/ifa/jor_rosc_cg.pdf> (last visited March 26, 2010).
 See Company Law No. 22 of 1997, supra note 19, at art. 192.a.
 See Companies Controller Directorate, An Overview 2-3 (2007)
 See Kon Sik Kim, Transplanting Audit Committees to Korean Soil: A Window into the Evolution of Korean Corporate Governance, 9 Asian-Pacific L. & Pol'y J. 163, 171-180 (2007) (discussing which directors should serve on the audit committee, the scope of its duties, and how it should operate).
 See Company Law No. 22 of 1997, supra note 19, at art. 192.a. See also Jordanian Court of Cassation, Case No. 2002/575, Adaleh Publications (March 13, 2002).
Association of Certified Public Accountants, Circular (June 19, 2007).
 However, courts in
held that auditors should do their job in proper manner even though their
remunerations were low. See Court of Cassation, Case No. 1976/135, Jordanian
Bar Association Journal 1907 (January 1, 1976) (Although the auditor audits
accounts for the company once or twice a month and his fees are low, he must do
his work properly).
 In the
the Independence Standards Board provided a definition of independence for auditors. Auditor independence is both independence of
mind - freedom from the effects of threats to auditor independence and independence in
appearance - absence of circumstances that would lead well-informed investors
and other users to conclude that there is an unacceptably high risk that an auditor lacks independence of
mind. See Sean M. O'Connor, Strengthening Auditor Independence: Reestablishing
Audits as Control and Premium Signaling Mechanisms, 81 Wash.
L. Rev. 525, 566-568 (2006).
 See Company Law No. 22 of 1997, supra note 19, at art. 197.
 See Andrew D. Bailey, Jr., The MultiDisciplinary Practice of Certified Public Accountants and Lawyers, 52 Case W. Res. 895, 897, 902 (2002) (the breadth of non-audit client/management services had increased to the point that it is the norm to refer to the "business" of public accounting rather than the "profession").
 See Matthew J. Barrett, "Tax Services" as a Trojan Horse in the Auditor Independence Provisions of Sarbanes-Oxley, 2004 Mich. St. L. Rev. 463, 472, 486 (2004). Auditing firms have attempted to expand their services to include certain legal services. See Alison H. Mijares, The Securities and Exchange Commission's Ban on Legal Services by Audit Firms: Amendments to Rule 2-01 of Regulation S-X Under the Securities Exchange Act of 1934, 36 U.S.F. L. Rev. 209, 226-228 (2001).
 See Company Law No. 22 of 1997, supra note 19, at art. 199.
 The principal-agent characterization resonates well in corporate law. See Faith Stevelman Kahn, Transparency and Accountability: Rethinking Corporate Fiduciary Law's Relevance to Corporate Disclosure, 34 Ga. L. Rev. 505, 507-18 (2000). Another viewpoint argues that auditors cannot engage in an agency relationship with the shareholders where by definition they become subject to the principal's control. Auditor duties should be conceived in formal rather than relational terms, with fidelity going to the rules, to the texts, and to the system that auditors apply. In other words, an auditor is faithful to Generally Accepted Accounting Principles, the elaborate system of rules and standards that determines accounting treatments. See William W. Bratton, Shareholder Value and Auditor
, 53 Duke L.J. 439, 445, 486 (2003). See also Amy Shapiro, Who Pays the Auditor Calls the Tune?
Auditing Regulation and Clients' Incentives, 35 Seton Hall L.
Rev. 1029, 1033 (2005) (auditors has
come to serve two masters- the public and the
corporation. The auditor is supposed to play the first role of scrutinizing
the corporation's financial statements in order to give a candid assessment of
quality. The auditor's actual fee-paying client,
however, is the audited corporation who hires the auditor to play the second role, that of certifying
 See Company Law No. 22 of 1997, supra note 19, at art. 193.a. The duty to monitor the company' activities was added in the Company Law of 1997. This duty was included in the 1989 Company Law as a general guideline, but in the 1997 Company aw Law it is included in the list of duties.
 See Ali A. Thnibat, Analytical Critical Study of the Consistency of the Auditors’ Duties and Responsibilities Mentioned by the Jordanian Acts with those of the International Auditing Standards, 31.1 Dirasat Journal: Administrative Sciences Series 10, 14 (2004).
 See Company Law No. 22 of 1997, supra note 19, at art.193.b.
 The Company Law of 1989 did not specify what was considered as generally accepted accounting and auditing standards. The Company Law of 1989 used the term in a vague form given that there were no such generally accepted standards applied in
 See Thomas C. Pearson, Creating Accountability: Increased Legal Status of Accounting and Auditing Authorities in the Global Capital Markets, 31 N.C.J. Int'l L. & Com. Reg. 65, 74-78 (2005).
 See Company Law No. 22 of 1997, supra note 19, at art. 193.d.
 Debentures are long-term debt notes issued pursuant to a trust indenture. The contract under which debentures are generally issued is called the trust indenture. The trust indenture is entered into between a trustee and the issuing corporation. The trust indenture specifies the rights and obligations of the debenture holders and the issuing corporation and usually delineates the terms of the securities. The indenture trustee has the responsibility of safeguarding the interests of the debenture holders. See Nancy T. Oliver, Fiduciary Obligations to Holders of Convertible Debentures, 58 U. Cin. L. Rev. 751, 754 (1989).
 The report of the auditor must include the reasons or circumstances hindering the auditor's work. See Company Law No. 22 of 1997, supra note 19, at art. 194.
 See Marshall A. Geiger, Setting the Standard for the New Auditor's Report: An Analysis of Attempts to Influence the Auditing Standards Board, 1 Studies in Managerial and Financial Accounting 7-12 (1993).
 See Company Law No. 22 of 1997, supra note 19, at art. 193.g.
A. Cunningham, Facilitating Auditing's New Early Warning System: Control
Liability, and ,
55 Hastings L.J. 1449, 1454-1460 (2004) (discussing the circumstances leading
to the issuance of adverse opinion and other forms of qualified opinions). Safe Harbors
 The notion of "presents fairly" is a source of continuing debate and controversy over its intended meaning because reasonable minds will differ as to when the financial statements "presents fairly" its results. The point at which financial information no longer "presents fairly" will differ based upon the judgment, experience, and tolerance level of the auditor. See Arthur Acevedo, How Sarbanes-Oxley Should be used to Expose the Secrets of Discretion, Judgment, and Materiality of the Auditor's Report, 4 DePaul Bus. & Comm. L.J. 1, 24 (2005).
 Much of what an audit requires is a review by the auditor of the accounting principles used by the company and an analysis of the estimates made in preparation of the company's financial statements. The application of these principles depends on the particular business situation. Estimates can vary greatly as well. The auditor may interview management, confer with outside sources, and look to industry standards to determine if the principles applied and the estimates made are reasonable.
 See Where was the Auditor in Jordan, Vol. 1.2 The Auditing Journal 1 (1990). See also Amending Accounting Information is not the Auditor's Authority, Vo. 2.6 The Auditing Journal 1 (1991).
 The expectation gap has been examined in several countries in academic and practitioner literature including the
United Kingdom, Canada, and
the . See David F. Birke, Toothless Watchdog: Corporate
Fraud and the Independent Audit - How Can the Public's Confidence Be Restored?
58 U. United States L. Rev. 891 (2004). See also Donald C. Langevoort, Managing
the "Expectations Gap" in Investor Protection: The SEC and the
Post-ENRON Reform Agenda, 48 Vill. L. Rev. 1139 (2003). Miami
 See Company Law No. 22 of 1997, supra note 19, at art. 198.
 See Jordanian Court of Cassation, Case No. 1998/336, Adaleh Publications (May 9, 1998) (the auditor is the one who drafts the auditor's report and signs it. Thus, the auditor is liable for what is stated in his report).
 See Company Law No. 22 of 1997, supra note 19, at art. 201.
 It is not an easy task to determine which users of financial statements or third parties could benefit from the audited statements and thus the auditor can liable to. The United States apply one of four legal standards to decide which non-clients have a cause of action against auditors: (1) privity; (2) near- privity; (3) the known users; and (4) the reasonable foreseeability rule. These four standards lie on a continuum. They can lead to different outcomes about whether the non-client has a right to sue even when they are applied to the same set of facts. See Denzl Causey, Accountants' Liability in an Indeterminate Amount for an Indeterminate Class: An Analysis of Touche Ross & Co. v. Commercial Union Ins. Co., 57
L.J. 379, 380 (1987).
 See Company Law No. 22 of 1997, supra note 19, at art. 201.
 In those few cases, auditors were prosecuted mainly on accusation of dishonesty but not on the basis of not reporting illegal acts or not applying professional standards of due care. Telephone Interview with two lawyers linked to corporate fraud cases in Jordan who asked for anonymity (April 21, 2010).
 Auditors involved in those cases were handed innocence verdicts or low level of penalties than can fall by obsolescence or general pardon given by the King on certain occasions and covering certain crimes.
 Insurance would cover honest mistakes of judgment, but not intentional misbehavior. Persons would not want to occupy auditor positions unless they were protected in situations where they had simply committed errors of judgment. With insurance, moreover, a corporation does not have to bear the entire cost of auditor negligence, because the risk of misfeasance is spread among all corporations as a cost of doing business. See
A. Cunningham, Securitizing Audit Failure Risk: An Alternative to Caps on
Damages, 49 Wm and Mary L. Rev. 711 (2007). See also Lawrence A. Cunningham,
Choosing Gatekeepers: The Financial Statement Insurance Alternative to Auditor
Liability, 52 UCLA L. Rev. 413, 427-429 (2004) (auditors use general malpractice
to cover all engagements).
 For example, in 1994 at least Canadian $1.3 billion of unresolved claims were pending against Canadian accountants. In the
, the Big Six (now
Big Four) accounting firms faced 627 outstanding legal cases claiming damages
of 20 billion by mid-1994. In United Kingdom Australia,
accountants faced more than Australian $3 billion in claims by mid-1993. In , the cost of
defending legal actions brought against accountants has become a major
business problem. In the New
Zealand United States,
in 1993, the Big Six accounting firms' expenditures for settling and defending
lawsuits were $ 1.1 billion or 11.9% of U.S.
domestic auditing and accounting revenue. See Carl Pacini, Mary Jill Martin,
and Lynda Hamilton, AT the Interface of Law and Accounting: An Examination of a
Tend toward a Reduction in the Scope of Auditor Liability to Third Parties in
the Common Law Countries, 37 Am. Bus. L.J. 171, 173 (2000). See also Carl Pacini, Andrew Greinke, and
Sally Gunz, Accountant Liability to Nonclient for Negligence in the United Kingdom,
Canada, Australia, and New Zealand, 25 Suffolk Transnat'l L. Rev. 17, 18-20