Auditors' Liability For Failure To 'Blow Whistle' On Fraud

In an important decision, the Commercial Court considered whether or not a company which had perpetrated a fraud could claim against its auditors for failing to detect and report that fraud. Even though this involved the company relying on its own fraud, the Court nevertheless held that it could continue with its claim against the auditors. This was, according to the Court, because the fraud was "the very thing" that the auditors were under a duty to identify, and the "ordinary citizen" would not find anything repugnant in allowing the company to make a recovery in such circumstances.

The facts

In this case, an individual, S was the directing mind and will of the claimant company which was used throughout as a "vehicle for fraud". The company's fraud consisted of collusion with a third party to create artificial commodity sales and the generation of documents relating to those artificial sales, for the purpose of obtaining funds under letters of credit issued by a bank for the company's benefit. The money received by the company was then passed on to the third party or to companies connected with the third party.

The bank had succeeded in a prior claim against both the company and S. The company went into liquidation and the judgment was unsatisfied. The...