JUST WHAT THE DOCTOR EXPECTED: SCOPE OF AUDITOR’S DUTIES – THE APPEAL

Legal Directions

Summary of Decision

Facts

The appellant, Cam & Bear Pty Ltd, was the trustee of a self-managed superannuation fund (the Fund) established for the benefit of Dr Lance Bear and his wife Jennifer Campbell. The trustee was Landav Pty Ltd, the directors of which were Dr Bear and Ms Campbell. Mr John McGoldrick, the respondent, was an accountant who audited the accounts of the Fund, including for the financial years ended 30 June 2003 to 2007 (the Auditor).

This appeal arose out of a claim for damages for negligence and misleading and deceptive conduct brought by Cam & Bear against the Auditor. It was alleged that the Auditor had breached his duty of care and engaged in misleading and deceptive conduct: first, by failing to qualify the audit reports as to the possibility that those assets described in the Fund’s financial statements as ‘cash’ may not be recoverable, they being in fact unsecured loans to a company (LSL Holdings) associated with Dr Bear’s friend, Mr Anthony Lewis; and secondly, by including in the audit reports a statement to the effect that the financial statements ‘presented fairly…the financial position of the Fund and the results of its operations and its cashflows’.

First instance decision

The trial judge found that the Auditor had been negligent and engaged in misleading and deceptive conduct, but that his conduct had not caused any loss to Cam & Bear. In particular, that any losses were not caused by the description as ‘cash’, but by an inappropriate level of trust by Dr Bear in Mr Lewis. That trust was misplaced and/or abused.

Appeal

On appeal, Cam & Bear argued:

  • That when considering the issue of causation, the trial judge erred in failing to have regard to the breadth of Cam & Bear’s case on negligence which, it contended, his Honour had accepted elsewhere in his judgment; and
  • The trial judge erred in his findings as to contributory negligence and proportionate liability.

The appeal was allowed, and Cam & Bear was awarded damages for its loss, less a 10% deduction for its contributory negligence.

Causation

The Court of Appeal held that the trial judge determined the issue of causation and, as a result, dismissed Cam & Bear’s claim for damages without taking into account the breadth of the findings of negligence that his Honour had previously made. It said that contrary to the Auditor’s submissions on appeal, Cam & Bear had conducted a case below that the Auditor breached his duty to Cam & Bear by not concluding that there was doubt as to the recoverability of the assets described in the financial statements as ‘cash’, and by failing to communicate that fact to Cam & Bear.

The Court found that Dr Bear’s un-contradicted evidence had been that he would have taken action to have the ‘loans’ to LSL Holdings recovered if he had known that they may not be able to be repaid. It held that the Auditor’s breaches of duty therefore caused Cam & Bear to continue to make payments to LSL Holdings that it would otherwise not have made.

Contributory negligence

The Court said that in making an apportionment case, based on a plaintiff’s contributory negligence, the Court must consider ‘the degree of departure from the standard of care of the reasonable man’ and ‘the relative importance of the acts of the parties in causing the damage’. It held that Dr Bear did depart from the standard of care that a reasonable person would have applied to protect his or her interests. The Court said that even a person with Dr Bear’s lack of financial sophistication should reasonably have considered the prudence of depositing significant amounts of money with Mr Lewis’ company.

However, it also said that lack of sophistication and his reliance on the annual audited accounts limited the criticism that can be made of him. It stated that the Auditor’s departure from the standards of a reasonable person in his position was significant. The Court held that the Auditor’s negligence was of significantly greater importance in causing Cam & Bear’s loss than that of Cam & Bear, and responsibility for the loss should be apportioned 10% to Cam & Bear and 90% to the Auditor.

Proportionate liability

The Court found that responsibility for a proportionate share of Cam & Bear’s loss should not be attributed to Cam & Bear’s directors. It said that to hold otherwise would not be ‘just’ within the meaning of the proportionate liability statutory provisions. This was because Cam & Bear’s damages would be reduced, both by reason of its contributory negligence resulting from the negligent acts of its directors, and by reason of the apportionment of a share of responsibility for Cam & Bear’s loss to the directors because of those very same acts and omissions.

Conclusion

This decision underlies the risk to auditors of self-managed superannuation funds, and their insurers, of failing to undertake proper enquiries to ensure the financial report is presented fairly, in circumstances where the client is often unsophisticated and expects the audit to be conducted for a modest fee.

It also highlights that a court will not be inclined to make a double deduction from a plaintiff’s damages by apportioning liability to a company’s directors in relation to the same conduct upon which a deduction has already been made for the company’s contributory negligence.

Further information / assistance regarding the issues raised in this article is available from the author, Greg King, Special Counsel, or your usual contact at Moray & Agnew.


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