AUDITORS LIABILITY IN THE ITALIAN LEGAL SYSTEM

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AUDITORS LIABILITY IN THE ITALIAN LEGAL SYSTEM

• LEGAL SOURCES
• CIVIL CODE
• SECURITIES LAWS (art.164 d.lgs.58/2008)
• CONSOB REGULATIONS
• PROFESSIONAL INTERNAL AND INTERNATIONAL
  PRINCIPLES

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Art.2407 codice civile auditors responsibility

• They are liable for the truth of their
  statements, and shall keep secret the facts and
  documents of which they have knowledge by reason
  of their office
• They are liable in solido with the directors for
  acts and omissions of the latter, when the injury
  would not have occurred if they had exercised
  vigilance in conformity with the duties of their
  office
• The auditors shall fulfill their duties according
  to the professionalism and diligence required by
  the nature of appointment

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GOOD BEHAVIOUR AS DEFINED BY COURTS

• not
• A TRUTH FINDER
• but
• A DILIGENT PROFESSIONAL

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Art.2409 bis codice civilestructure of
accounting control-external professional control-

• The accounting control on the company is
  exercised by an auditor or by an auditing company
  registered in the register created with the
  ministry of Justice.
• In the companies which make recourse to market of
  risk capital the accounting control is exercised
  by an auditing company registered in the register
  of examiners of accounts which, exclusively for
  such activities, is subject to the discipline of
  auditing activity contemplated for companies
  listed on the stock exchange and to the
  supervision of the National Stock Exchange
  Committee.

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Art.2409 bis codice civilealternative
structure-model of internal accounting control-

• The by-laws of the company which do not have
  recourse to the market of risk capital and which
  are not required to have consolidated accounts
  may contemplate that the accounting control is
  exercised by the board of auditors
• In such a case the board of auditors is formed by
  examiners of accounts registered in the register
  with the ministry of Justice

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2409 ter c.c. accounting control powers Duties
of Investigation Inquiry Disclosure

• 
  Duties
• The examiner of accounts or the
  company entrusted with the
• Verifies during the fiscal year and at least
  every quarter, the regular keeping of companys
  accounting and the correct notation of the book
  entries of the facts pertaining to the management
• Verifies if the balance sheet for the fiscal year
  and, if drafted, the consolidated accounts
  correspond to the results of the book entries and
  to the controls made, and if they are in line
  with the regulating provisions of law
• Expresses with a specific report an evaluation on
  the balance sheet and on consolidated accounts,
  if drafted.

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Art.2409 ter c.c.public report and investigation
power

• The report is deposited within the premises of
  the legal address of the company in accordance
  with art. 2429 c.c.
• The examiner of accounts or the company entrusted
  with the accounting control may request the
  directors documents and information useful for
  the control and may proceed with inspections. It
  documents its activity in a specific book, kept
  with the registered office of the company or in a
  different place established in the by-laws...

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ART. 2409 QUATER C.C.Appointment - Fee - Length
- Revocation-contract imposed by law-

• The appointment of the accounting control is
  given by the shareholders meeting, after having
  heard the board of auditors, which determines the
  fee for the examiner of accounts or the
  accounting company for the entire duration of the
  appointment.
• The appointment has a duration of three fiscal
  years, with maturity on the date of meeting
  convened for the approval of the balance sheet
  for the third fiscal year of appointment.
• The appointment may be revoked only for cause,
  after having heard the board of auditors. The
  resolution of revocation must be approved by
  decree of the tribunal, after having heard the
  interested party

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Art.2409 quinquies cause of ineligibility and
forfeiture

• The internal auditors cannot be entrusted with
  accounting control and, if appointed, forfeit
• The by-laws may contain other provisions of
  inelegibility or forfeiture as well as reasons
  of incompatibility. They may contemplate also
  additional requirements concerning the specific
  professional qualification of the subject
  entrusted of the accounting control.
• In the case of auditing company the provisions of
  this article apply with reference to its members
  and third persons.

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Art. 2409 sexies c.c.extension of liability rule

• The subjects entrusted of the accounting control
  are subjected to the provisions of art. 2407 c.c.
  And are liable towards the company, its members
  and third parties for the damages deriving from
  non compliance of their duties
• In the event of accounting companies the subjects
  who have exercised the accounting control are
  liable in solido with the company itself.
• The action expires in five years from the
  termination of the appointment

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Relationships with corporate boards

• rule
• NO FIREWALLS
  between internal and external control
  bodies

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Art.2409 septiesmandatory exchange of information

• The board of auditors and the subjects
  entrusted with the accounting control exchange on
  timely basis the information relevant to the
  performance of their duties

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public agencies control

• SECURITY ACT AND BANKING ACT
• CONSOB (TUF)
• BANCA DITALIA (TUB)

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2409 c.c.judicial control and power report to
the Court

• Basis of suspicion of serious irregulatories in
  the management committed by the directors in
  violation of their duties
• May be filed by one tenth of the companys
  capital or one twentieth of public company
  capital by board of auditors (not singular
  auditors) by CONSOB ( SEC) and/or PUBLIC
  PROSECUTOR in public companies.
• LEADS TO
• Investigation over the company by an expert
  appointed by the Court
• Revocation of the board of directors and,
  eventually, of the internal board of auditors
  with appointment of a Temporary Judicial
  Commissioner

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risk

• different kinds of control bring to
  disfunction in the control itself

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Auditors liability rule Summary

• Unlimited liability towards the company,
  shareholders and third parties ( including
  whoever claims a damage)
• Based on a contract with the company imposed by
  law, without possibility of a liability cap
  clause
• Based on of professional negligence as defined by
  laws and regulations

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Auditors Liability Rulein Courts

• Based on a contract imposed by law
• without possibility of liability caps
• Based on evidence of professional negligence as
  defined by laws and regulations
• Based on evidence of causal relationship between
  misconduct and direct damages

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How it worked so far

• In a substantial lack of internal control
• In an ineffective system of public control
• In an ineffective criminal and civil trial
  system
• In absence of a class action

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conclusion

• It is model of unlimited liability rule towards
  the company and third parties that allows
  compensation for every personal direct damage,
  if proven
• It needs real and effective enforcement
• A liability cap would be possible only by law
  and according to constitutional principles