The Gazette 1989

GAZETTE

DECEMBER 1989

-v- Boland & Ors., unreported, supra, the plaintiffs claimed damages for negligent mis-statement by the company auditor based on his failure to detect errors in stock- taking figures in the company's audited accounts. The accounts were used in subsequent negotia- tions leading to the purchase of the business assets by the plaintiffs. Lardner J. cited Woolf J's statement of the law on auditors' liability in J.E.B. Fasteners -v- Marks Bloom & Company, [1981 ] 3 All ER 289, with approval. At p. 296 Woolf J. said:- " W i t h o u t laying down any principle which is intended to be of general application on the basis of the authorities which I have cited, the appropriate test for establishing whether a duty of care exists, appears in this case to be whether the defendants knew or reasonably should have foreseen at the time the accounts were audited that a per- son might rely on those accounts for the purpose of deciding whether or not to take over the company and therefore could suffer loss if the accounts were inaccurate. Such an approach does place limitations on those entitled to contend that there has been a breach of duty owed to them. First of all, they must have relied on the accounts and, second, they must have done so in circum- stances where the auditors either knew that they would be relying on their accuracy or ought to have known that they might." The longer the period that has elapsed between the audit and the

time that reliance was placed upon the audited accounts, the more diffi- cult it will be for a plaintiff to establish that the auditor ought to have foreseen that his certificate would be relied upon. In Kelly -v- Boland and Ors., the auditor was aware of an imminent sale of the business when he audited the 1976 Accounts. Lardner J. was also of the opinion that when the 1975 audit was conducted, the auditor ought, in the light of his knowledge at the time, to have foreseen that reliance might be placed on the accuracy of the accounts in a subsequent sale of the business and assets of the company. The company was in financial difficulties at the time. Lardner J. dismissed the plaintiffs' claim in relation to the ' 73 and ' 74 audits. Although Mr. Justice Lardner found that, having regard to the professional standards prevailing at the time of certification, the audit- ors were negligent in failing to ensure the accuracy of the stock- taking figures by attending at and observing the stocktaking exercise, he nevertheless held against the plaintiffs. He held the plaintiffs had failed to prove that any inaccuracies in the figures for stock had misled them as to the profits and losses for the years ' 75 and '76. In a claim for negligent mis- statement, it is therefore clearly not sufficient to prove that there were inaccuracies in the audited accounts and that the auditor was

negligent in failing to detect them. It must further be proved that the plaintiff relied upon the accuracy of the accounts, and such reliance was foreseeable and further that the plaintiff suffered economic loss as a result. In J.E.B. Fasteners -v- Marks Bloom & Company, supra, the plaintiffs proved the auditors had been negligent in conducting the audit and t hat the company accounts had given a false and misleading impression of the company's financial position. The plaintiffs pleaded reliance on the audited accounts in their takeover of the company, but Woolf J. refused the plaintiffs' claim for damages concluding that even if the plaintiffs had known " t he true financial position of the company at the time" they would not have acted any differently and consequently they had failed to establish a sufficient nexus between the auditor's negligence and their economic loss. The recent case of Caparo Industries pic -v- Dickman and Ors. [1989] 2WLR 316 shows a further development of the law in this area. The English Court of Appeal in a 2:1 decision (O'Connor, Bingham and Taylor L.JJ.) re-examined the role of the statutory auditor in the particular context of a public limited company. Lord Justice Bingham stated the primary duty in and about the preparation of the company's annual accounts rests with the directors. The auditor's role, he said, was secondary and accessory, his

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