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ACCA Applied Skills · Corporate and Business Law (Global) · Other company officers

Paloma plc's auditor, Ravi, holds a small number of shares in Paloma plc, bought after his appointment. Under the usual company law rules on auditor eligibility and independence, what is the position?

Ravi should not act as auditor. Owning shares in the audited company gives him a financial interest that threatens his independence, so he is treated as unsuitable however small the holding is, and directors' approval cannot remove the conflict.

  1. ARavi remains eligible because a small shareholding is not a disqualifying interest
  2. BRavi should not act as auditor because holding shares in the audited company is a conflict that undermines independenceCorrect
  3. CRavi may continue only if the directors approve the shareholding

Explanation

Auditors must be independent of the company they audit. A financial interest such as a shareholding creates a self-interest threat and is a recognised ground of ineligibility, regardless of size. Director approval cannot cure it because directors are the party being audited.

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