Good News for Auditors?

The judgment of Mr Justice Evans-Lombe handed down on 20 March 2002,

allows the proceedings brought by Baring Futures (Singapore) (ìBFSî)

against Deloitte & Touche (Singapore) (ìD&Tî), its former

auditors, to proceed to full trial in May of this year. However, the

judgment itself has some important implications for companies, for

auditors and for insolvency practitioners in terms of representations

given to auditors by representatives of a company.

As a preliminary issue, D&T had argued that the claim against them

in respect of the 1992 and 1993 audits of BFS was bound to fail as, in

both of these audits, they had relied on representation letters addressed

to them and signed by the Finance Director of BFS, Mr Simon Jones. Mr

Jones, they said, had signed these letters recklessly and thus

fraudulently and it amounted to deceit. D&T said that this provided

them with a complete defence of circuity of action and/or set-off

extinguishing BFS' claim.

Mr Justice Evans-Lombe held that, although certain of the

representations in the letter were inaccurate and Mr Jones an

unsatisfactory witness, D&T had failed to show that Mr Jones was

recklessly fraudulent in signing the representation letters and therefore

did not succeed on the preliminary issue.

Although this was sufficient to determine the preliminary issue, the

Judge went on to deal with the issues of law which had been argued before

him, namely: (1) materiality; (2) inducement; (3) causation and (4)

vicarious liability.

Materiality: the Judge said that he was satisfied that the

representation letters were material, in the sense that D&T would

not have signed their audit opinions on the statutory accounts without

receiving them; although he did not decide the point, he inclined to the

view that materiality was not a separate requirement of an action in

deceit, but rather an aspect of proving inducement.

Inducement: on the basis of Mr Jones' evidence, the Judge

said that by signing the representation letters, Mr Jones did intend to

induce D&T to sign their audit opinions and that, as a matter of

fact, it did so induce them.

Causation:

in deceit claims, there is a requirement of causation over and

above the requirement to prove inducement.

the Judge found that the signing of the audit reports induced by

the representation letters was a substantial cause of D&T being

sued for negligence, even if their negligent work (which was assumed

for the purposes of the preliminary issue) might have been a...