The Legal Regime of
Auditors According to the Company Legislation in Jordan
Bashar H. Malkawi*
I. Introduction
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.[1] 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.[2] 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 Jordan .
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 Jordan
Regulation of the audit
profession in Jordan
is relatively recent. In 1961, audit practice was unorganized and practitioners
were not required to satisfy any level of academic knowledge or work
experience.[3] This
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
auditor.[4] In
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.[5] 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.[6]
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.[7] The
Audit Profession Association monitors the performance of auditors and accountants
to ensure their compliance with laws and accounting and auditing standards.[8]
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.[9]
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.[10]
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.[11]
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.[12]
The classification of auditors into categories may prove irrelevant as the
majority of auditors can be classified into category A.[13]
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 Jordan
have a union since 1950s.[14]
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
safety networks.
The first
audit office, George Khader's firm, opened in Jordan
in 1944. Saba & Co, a prominent Arab audit firm, established its branch
office in Jordan
in 1948.[15] 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.[16]
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.[17]
The degree to which rules are legislated can impact the nature of the auditing
regime.
The Company
Law No. 22 of 1997 is considered a major source for regulating auditors.[18] 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.[19]
The Company Law excluded from the list general and limited partnerships and mahassa
company (silent company).[20] 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 Jordan .
The general meeting of shareholders then votes in favor of or against that auditor.[21] 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.[22] 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.[23]
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.[24]
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 Jordan .[25]
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.[26] 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 Jordan .
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.[27] Audit
remuneration in Jordan
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).[28] 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.[29]
Further regulations should set a minimum level of auditor's remuneration commensurate
with his duties and risks.
B. Auditors Independence
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."[30] 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.[31]
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.[32]
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.[33] 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.[34] 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.[35]
The relationship between auditors and shareholders is a classic agent-principal
issue.[36] 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.[37]
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.[38]
An
auditor is also required to audit company's accounts according to recognized
auditing, scientific, and technical standards.[39]
As for standards of auditing and accounting, the Company Law of 1997 provided a
relatively better definition compared to the previous law of 1989.[40]
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
Association.
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.[41]
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.[42] 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.[43] 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.[44] 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.[45] 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.[46] 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.[47]
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.[48]
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.[49]
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.[50] 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.[51] 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.[52] 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.[53]
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.[54] 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.[55]
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.[56]
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.[57]
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.[58] 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.[59]
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.[60] 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."[61] 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.[62]
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.[63]
This gap refers to a difference between auditors' understanding of their
function and investors' expectations of the auditor's role.[64]
E.
Attendance of the General Meeting of Shareholders
The Company Law
compels the auditor to attend the general meeting of shareholders.[65]
Attendance of the auditor allows shareholders to discuss with him directly issues
that arise from the financial statements of the company.[66]
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.[67] 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.[68]
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.[69]
Violations of the Company Law carry compensatory damages and criminal
penalties.[70] 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.[71] 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.[72]
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.[73] Reliable
estimates of actual penalties and verdicts against auditors are difficult to
obtain.[74] Due
to this state of affairs in Jordan ,
it is reasonable expect that there are no provisions on auditor liability
insurance.[75] In
contrast, Canada , the United
Kingdom , Australia , New
Zealand , and the United
States have a substantial increase in
auditor litigation.[76]
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.
Conclusion
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 Jordan
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 Jordan
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
regulatory initiatives.
* 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.
[1] Jordan
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).
[2] 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 ).
[3] See N.S.
Khouri, The Evolution of the Audit Profession in Jordan, Al-Iqtisadi
Al-Urduni (The Jordanian Economist) 82-83 (1994).
[4] See K.A.
Abdullah, The Audit Profession in Jordan
and Kuwait : A
Comparative Analytical Study, 9.2 Dirasat Journal 131-151 (1982).
[5] 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 Jordan .
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).
[6] See
Provisional Law on Organizing the Audit Profession No. 73 of 2003, Office
Gazette No. 4606 (June 16, 2003).
[7] Id.
art. 4.
[8] Id.
art. 8 & 9.
[9] Id.
art. 22 & 28.
[10] Id.
art. 30.
[11] Id.
art. 26. See also Regulation for Classifying Auditors No. 30 of 1986, Official
Gazette No. 3389 (April 16, 1986).
[12] 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.
[13]
Category A requires a minimum of a first university degree in accounting and
three years of experience in accounting and auditing. Id.
[14] See
History of Jordan Bar Union, available at <http://www.jba.org.jo/AboutUs/AboutUs.aspx>
(last visited April 12, 2010).
[15] See
Ahmed Saadah, The Evolution of the Accounting and Auditing Profession in Jordan ,
Vol. 29 The Auditing Journal 23-25 (1996).
[16] See
Modar A. Abdullatif, The Role of Auditing in Jordan :
An Empirical Study Expectations 85 (2003) (unpublished Ph.D dissertation, University
of Manchester
[17] 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).
[18] 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).
[19] 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).
[20] 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).
[21] See
Company Law No. 22 of 1997, supra note 19, art. 192.a
[22] 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).
[23] See
Company Law No. 22 of 1997, supra note 19, at art. 192.a.
[24] Id.
art. 192.b.
[25] See
Companies Controller Directorate, An Overview 2-3 (2007)
[26] 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).
[27] 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).
[29]
However, courts in Jordan
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).
[30] In the U.S. ,
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).
[31] See
Company Law No. 22 of 1997, supra note 19, at art. 197.
[32] Id.
[33] 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").
[34] 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).
[35] See
Company Law No. 22 of 1997, supra note 19, at art. 199.
[36] 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 Independence
[37] 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.
[38] 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).
[39] See
Company Law No. 22 of 1997, supra note 19, at art.193.b.
[40] 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 Jordan
[42] 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).
[43] See
Company Law No. 22 of 1997, supra note 19, at art. 193.d.
[44] Id.
art. 193.e.
[45] Id.
art. 193.f.
[46] Id.
art. 202.
[47] Id.
art. 203.
[48] 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).
[49] 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.
[50] 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).
[51] See
Company Law No. 22 of 1997, supra note 19, at art. 193.g.
[52] Id.
art. 195.a.1.
[53] Id.
art. 195.a.2.
[54] Id.
art. 195.a.3.
[55] Id.
art. 195.a.4.
[56] Id.
art. 195.a.5.
[57] Id.
[58] Id.
art. 195.b.
[59] Id.
art. 196.
[60] See Lawrence
A. Cunningham, Facilitating Auditing's New Early Warning System: Control
Disclosure, Auditor
Liability, and Safe Harbors
[61] 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).
[62] 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.
[63] 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).
[64] The expectation gap has been examined in several
countries in academic and practitioner literature including the United Kingdom , Canada , and
the United States Miami
[65] See
Company Law No. 22 of 1997, supra note 19, at art. 198.
[66] Id.
art. 199.b.
[67] 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).
[68] See
Company Law No. 22 of 1997, supra note 19, at art. 201.
[69] 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 Miss.
L.J. 379, 380 (1987).
[70] See
Company Law No. 22 of 1997, supra note 19, at art. 201.
[71] Id.
[72] Id.
[73] 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).
[74]
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. Id.
[75]
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 Lawrence
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
liability insurance
to cover all engagements).
[76] For
example, in 1994 at least Canadian $1.3 billion of unresolved claims were
pending against Canadian accountants.
In the United Kingdom Australia ,
accountants faced more than Australian $3 billion in claims by mid-1993. In 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
(2001).
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