By Magnus Brorsson

On 1 January 1999 several amendments to the Swedish Limited Companies Act will enter into force. Among these changes are important changes to the regulations concerning auditors. The position of the auditors will be strengthened in some respects, but there will also be changes that place the auditors in a rather awkward position in some situations.

All Swedish companies must have at least one auditor. The present situation is that at least one of the auditors must be chartered or approved. Together with the chartered or approved auditor, it has up until now been possible to appoint nonprofessional auditors. Such nonprofessional auditors have had the same legal position as the chartered or approved auditor. This has been considered not to be in accordance with the directive 84/253/EEG and this possibility for Swedish corporations to appoint nonprofessional auditors is terminated as of 1 January 1999. However, at the same time a new possibility to appoint nonprofessional auditors is introduced. These new nonprofessional auditors shall, however, not audit the books of account, but rather determine whether the activities in the company are managed in a manner that is well adapted to their purposes and financially sound. They shall also determine whether the internal controls of the company are sufficient.

The term of office for (chartered or approved) auditors shall in the future always be four years. It shall, however, be possible to re-elect auditors and auditors can of course leave the assignment during the four year period. This is a major change, since the term of office for auditors is not currently regulated by law and the normal term of office has in practice always been one year.

The most radical part of the new legislation is, however, the new duty for the auditor to act if he suspects certain criminal activities in the company. The traditional role of the auditor in Sweden is that he is appointed by the shareholders to audit those they have elected to a position of trust to represent their interests, the board, to verify that the board is managing the company in a correct manner. The auditor is, thus, himself a person appointed by the shareholders to a position of trust. Quite in contravention of this principle, the government has wanted to use the auditors and their insights to attack white collar crime. This has now lead to a duty for all Swedish auditors to report to the board if he has reason to suspect that a board member or the managing director has committed certain crimes within the framework of the company. The crimes enumerated include among others fraud, embezzlement, swindle, fraudulent conveyance and bribery, as well as criminality in connection with taxes and tax payment.

As it would be rather meaningless, or even contra-productive, to inform a board that could be expected not to react properly, no such duty exists where that is what the auditor may expect is the case. However, if that is the case, he must immediately do what he otherwise would have to do if the board neglected to react properly to his report, namely to resign from his appointment and report the suspicions he has to the public prosecutor. The only situations where the auditor can stay in office if he has suspicions of this kind where the board tells him, within two weeks from his report to the board, that the suspicion has already been reported to the police or that the financial damage from the suspected crime has been compensated for.

During the work that lead to this legislation it was argued by many institutions and associations that a reporting duty of this kind would put the auditor in an awkward position towards the company and also could impair the audit as such, since it could impair the trust between the auditor and the company management. This question is mentioned in the legislative history, but no real answer is given. It is considered that this risk is reduced or perhaps even avoided by the rule that the first action shall be a report to the management and not to the police. Also, the rule that the auditor is exempted from his duty to resign and report the suspicion to the police if the financial damage has been remedied is considered to promote the trust between the auditor and the management.

What if the auditor is mistaken? What if the auditor resigns and reports the company to the police, and it is later found that no crime had been committed? Perhaps the auditor had insufficient basis for his suspicions. Is the auditor liable for the damage the company may suffer from this? And what if he fails to report a suspicion that should have been reported? The normal rule is that an auditor is liable to compensate the company for damage that he causes through negligence in the performing of his duties. To avoid too broad a responsibility for the auditor, it is expressly stated that the auditor is financially responsible for the damage caused by a report to the police only if he reports incorrect facts, even though he had reasonable cause to believe that the information was incorrect. The auditor can never be financially responsible for neglecting to report crimes, but such neglect could of course lead to disciplinary punishment from the professional auditing bodies.

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