Ethical Question

Ethical Question

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We set up a company - one director, who holds 90% of the shares with 10% being held by a third party. Third party is investing in the company and an agreement has been drawn up between the parties. The minority shareholder filed with us a request for an audit prior to the year end and a timetable was set for the audit. No records have been received. The investor suspects that all is not well as he is aware of monies paid to the company for supplies, which have not been sent.

To cut a long story short, we have now received a letter from another accountant who has been requested to act. The firm, as far as I can tell from the headed paper, is not a registered auditor. I have been informed that I cannot reply to the new accountant without the director’s authority, who will not respond to us, he won't even take a phone call. Secondly I cannot inform the minority share holder of what’s going on - even though it is sounding very much like his investment may be at stake. The investor wants to know what is happening and from what I can gather I can't tell him anything, which doesn't seem very ethical!

In addition an annual return has apparently (I haven't checked yet) been filed showing the director with 100%.

Any help with what action we should take, if any, greatly appreciated.

Anon

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By martinfoley07
23rd Jan 2007 18:10

what rights.....
...does the 10% minority have under the agreement? Who drew up the agreement? If it was not tightly drawn up, he is indeed likely to be shafted.

How did the minority shareholder "file with you" a request for an audit!? That is a bit bizarre, and strange wording. Through the company, or by direct contact?

Whatever, I assume you were NOT ever appointed auditor? (if you were appointed auditor, it can change certain elements).

What are the terms of your letter of engagement, and has your engagement been terminated?

Who de facto appointed you as accountants to the company - was your contact the 90% shareholder or the 10 shareholder?

I would be tempted to write to the company saying you have received the new appointees letter (again, I presume that their courtesy letter to you did NOT specify they were being asked to accept audit appointment,) and saying you assume that, unless you hear to the contrary within say three weeks, you are able to respond as a matter of professional courtesy. Alternatively, you may certainly respond by saying you are unable to obtain permission to respond to their letter. That is a factullay accurate matter which you cannot be criticised for, let alone anything worse. If your intention is to forewarn the new accountants there may be issues, that would at least achieve that objective.

But surely it is up to the 10% shareholder to action such matters as to who owns the shares/who has filed retunrs etc etc,?

It all just seems a bit odd - is this just a row between the controlling sharehoder and an investor who is now highly nervous (and needs to be if he is a 10% shareholder in a private company without an excellent shareholder agreemtn).

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David Winch
By David Winch
23rd Jan 2007 13:06

Awkward situation!

This is an awkward situation.

I would have thought it was OK to write to the proposed new accountants a 'one line' letter saying no more than that you are awaiting the consent of the company to enable you to respond to their enquiry.

I don't think you can directly contact the minority investor. However you may wish to write to the company requesting consent to correspond freely with the proposed new auditor and drawing the attention of the director(s) to your obligations and rights under company law.

I may be out of date here, but I am referring to sections 391 to 394A Companies Act 1985. This includes the right to require a meeting of shareholders (see section 392A).

Talk to a lawyer who is up to date with company law.

You might consider suggesting to the director(s) that rather than doing all this formal stuff they just organise a meeting of yourself and all the shareholders at which any relevant matters can be discussed freely and openly.

I would suggest you get a copy of the annual return from Companies House (costs about £1 and can be downloaded over the internet).

If you suspect a fraud, then don't forget your obligations under PoCA 2002 / MLR 2003 to report to your firm's MLRO who may need to report, in turn, to SOCA.

David
www.mlrosupport.co.uk

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By listerramjet
23rd Jan 2007 13:34

agree with David
this is an awkard situation.

It sounds like you have accepted an appointment as auditor, and you remain the auditor of the company until such time as you resign or the company does not reappoint you, and as such you have certain rights and obligations - one of which is to conduct your audit. You could do that but it sounds like you would not get paid.

Given the breakdown in communications with the company perhaps you should consider resigning as auditor.

In any case, taking legal advice, and also consulting your PI supplier, would seem to be sensible advice

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By AnonymousUser
23rd Jan 2007 13:56

Special resolution
Presumably there may have been one of these passed and with 90% majority the director could have pretty much done anything they wanted to the minority shareholding?

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