Role, Duties and Obligations of Auditors

This chapter critically examines the responsibilities and legal obligations imposed on auditors under common law principles and within jurisdictions that share similar legal foundations. The primary objective is to assess the adequacy of these obligations in addressing modern financial risks, with particular focus on the Malaysian regulatory framework. Key legislative and regulatory instruments under review include the Companies Act 2016 (CA 2016), the Financial Services Act 2013 (FSA 2013), the Central Bank of Malaysia (CBM) Guidelines, the Capital Markets and Services Act 2007 (CMSA 2007), the Bursa Malaysia Listing Requirements (BMLR), and the Malaysian Code on Corporate Governance 2021 (MCCG 2021). This is because the backdrop of recurring financial scandals, both domestically and internationally, has brought renewed scrutiny to the auditor’s role. These incidents underscore the urgent need to interrogate the effectiveness of existing legal frameworks in preventing misconduct and ensuring accountability. Accordingly, this chapter aims to identify the systemic and regulatory gaps that have contributed to such failures and concludes by recommending modern reforms to strengthen audit practice and mitigate the risk of future financial collapses. Historically, the role of auditors has undergone significant evolution. In the seminal case of Re Kingston Cotton Mill Co (No 2) [1896] 2 Ch 279, 288, Lopes LJ famously likened auditors to watchdogs, asserting they were “not bound to be detectives,” thereby setting a tone of passive oversight. However, by 1898, courts began to acknowledge that detecting fraud could fall within the auditor’s remit, though this expectation was inconsistently applied over time. A more progressive view emerged in Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd [1958] 1 All ER 11 at 23, [1958] 1 WLR 45 at 61 (House of Lords), where Lord Denning emphasized the need for auditors to act with professional skepticism, remain alert to potential errors or fraud, and verify the reliability of financial statements. The ongoing relevance of the watchdog metaphor has since been debated. If auditors are merely passive observers, not responsible for uncovering fraud or reporting it to shareholders, they risk becoming overly compliant with management—figuratively transforming from watchdogs to management’s lapdogs. Such a passive stance fails to address the reality that fraud can originate from within the company, often at senior levels. Without a clear duty to investigate fraud actively, significant misconduct may go undetected, ultimately undermining the auditor’s purpose. This chapter argues that reform is necessary not merely to respond to past scandals, but to realign the auditor’s role with contemporary expectations of accountability, independence, and public interest protection. In doing so, it calls for a reassessment of statutory duties, enforcement mechanisms, and the broader professional culture surrounding audit practice.