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Commercial Litigation and Financial Audit: Evidentiary Aspects - International Law Office

International Law Office

Company & Commercial - Kenya

Commercial Litigation and Financial Audit: Evidentiary Aspects

October 26 2009

Audit Legislation

To What Extent Should Legal Liability be Apportioned to Auditors?

Audit Legislation

Every financial enterprise operating under the veil of incorporation must undergo audit, yet there is no single act of Parliament which deals with this area. Rather, the relevant legislation is to be found in various sections of different acts, such as the Companies Act, the Insurance Act (Cap 487, Section 143) on accounts and audit, the Banking Act (Cap 488, Section 24) and the Cooperative Societies Act (Cap 490, Section 25).

These acts and others make reference to audits and auditors on various occasions. Section 158 of the Companies Act requires as follows:

"A copy of every balance sheet, including every document required by law to be annexed thereto, which is to be laid before a company in a general meeting, together with a copy of the auditors report, shall, not less than twenty-one days before the date of the meeting, be sent to every member of the company."

Section 162(1) stipulates that:

"The auditors shall make a report to the members on the accounts examined by them, and on every balance sheet, every profit and loss account and all group accounts laid before the company in general meeting during their tenure of office, and the report shall contain statements as to the matters mentioned in the Seventh Schedule."

The act goes further to make provision for audit:

"The nature of these provisions is such that the responsibility of submitting an audit account does not include a concomitant duty upon the auditors to exercise due diligence under a duty of care or to furnish fair and true accounts of statements of account."


The law provides an evidential provision allowing financial aspects that are necessary in court proceedings to be investigated within the court. Section 37 of the Evidence Act (Cap 80) stipulates that, under special circumstances, entries in books of account which have been regularly kept in the course of business are admissible as evidence, provided that they refer to a matter which the court is to investigate. However, evidence obtained from such statements alone is not sufficient to charge any person with liability.

Section 48 of the same act sets out the rules regarding the provision of 'opinion and expert evidence', relating to persons who present and interpret the raw data from which the court is to draw inference and reach conclusions. Such persons are asked to give evidence in order to allow the court to form an opinion under Section 49 of the Evidence Act.


Auditors have no express duties beyond those of professional persons. As a result, factual inferences that are intended to be drawn from auditor's reports based on a company's accounts often contain grey areas. It then becomes the duty of the court to decide whether the professional advice was satisfactory. Since the court's role is to draw inference from the material placed before it, the duty of the auditor is to interpret, distil and reach a conclusion from the facts presented and to relay this to the court, with the guidance of counsel. This results in what has been termed a 'litigation risk' in other jurisdictions (ie, the possibility that the auditor's distillation of issues may be skewed to absolve himself or herself of any professional negligence or malpractice).(1)

In order to mitigate the risk of a court being misled in this way (given its dependence upon professional expert advice), an alternative method of apportioning legal liability to auditors premised on their representations in court would be useful.

To What Extent Should Legal Liability be Apportioned to Auditors?

Since the result of a litigation claim of a technically commercial nature often depends on an auditor's evidence as an expert witness, the auditor's legal liability should reflect his or her ability to influence the outcome of a case. To solve the dilemma on how conflicting reports from different auditors are to be weighed, recourse should be to made to third-party audit evidence. Third-party evidence which is consistent with earlier presentations should be seen as affirming earlier audit reports.

However, auditors who have the confidence of the court should be subject to statutory liability in order for them to be held accountable for any malpractice or deliberate misdirection of the court.

For further information on this topic please contact Eric Kanui at Njoroge Regeru & Company by telephone (+254 20 271 8482), fax (+254 20 271 8485) or email (eric@njorogeregeru.com).


(1) International Journal of Auditing (1998) Volume 2, 212-232 "Perceptions of Auditor Responsibility: Views of the Judiciary and the Profession", Brenda Anderson, Mario Maletta and Arnold Wright.

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