Following its decision last year in
Background
GT admitted that, during its audit work, it failed in its duty to identify certain instances of management fraud. GT accepted that it should not have given an unqualified audit report on the 2009 and 2010 accounts. GT also accepted that, if it had applied appropriate professional scepticism and competence, it would have uncovered many (if not all) of the dishonest misrepresentations and false evidence provided to it by the
It was common ground between the parties that, but for such admitted breaches of duty, the business of
GT denied that such a "counterfactual" situation would have unfolded as alleged by
At First Instance, the Judge found that the alleged counterfactual scenario would have occurred. The Judge also held that the trading losses suffered by
The Appeal
The appeal was brought by GT on three grounds. The first of these grounds, which is the focus of this article, was that the Judge at First Instance had failed properly to apply "SAAMCO" principles when deciding whether the trading losses suffered by
GT's appeal was, for the most part, dismissed.
The lead Judgment in the
To that end, Richards LJ discusses the importance of determining whether the professional defendant was "providing information" or "giving advice". In an "advice" case, the defendant has a duty to protect the claimant against the full range of risks associated with entering into a transaction. On the other hand, in an "information" case, the defendant has supplied only a part of the material on which the claimant decided to enter into the transaction; the identification of other considerations, and the overall assessment of the merits of the transaction, are matters for the claimant. It follows that, in an "information" case, the defendant is "liable only for the financial consequences of [the information] being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater". Put another way, the defendant is not liable for consequences which would have occurred even if the information had been correct.
In applying such principles to
- Unlike a professional providing advice or information on a particular aspect of a proposed transaction (that being the classic "SAAMCO" scenario), an auditor is performing a statutory duty which relates to all matters which the directors are required to report in their company's accounts.
- Nevertheless, there is no substantial reason why the SAAMCO principles cannot, or should not, be applied to determine whether particular losses come within the scope of an auditor's duty when signing an unqualified audit certificate.
- The scope of an auditor's duty is determined by reference to the purposes of the statutory requirement for an audit.One such principal purpose is to afford a company the opportunity to call its senior management into account, and to ensure that errors in management are corrected.In the present case, GT failed to detect the dishonest concealment of substantial losses suffered by
AssetCo , and the group's insolvency.This failure deprivedAssetCo of the opportunity to call its senior management to account. - A key question was whether the trading losses suffered by
AssetCo , in funding its subsidiaries after the 2009 audit, fell within the scope of GT's duty.As to this, a major part of the case against (and accepted by) GT was that, at the time of the audit, theAssetCo business was ostensibly sustainable only on the basis of the dishonest representations or unreasonable decisions made and taken by management, which GT failed to detect.In breach of duty, GT deprivedAssetCo of the very information that would have caused it to cease its loss-making activities, and to take steps necessary to regain its solvency.For "SAAMCO" purposes, the "information" provided by GT toAssetCo was wrong.Such negligence was not merely the occasion for the losses whichAssetCo continued to incur, but was a substantial cause of those losses.For these reasons, GT was held liable for the losses incurred byAssetCo in continuing to support its loss-making subsidiaries following the audit. - On the other hand,
AssetCo also suffered loss as a consequence of one of its directors misappropriating company funds for his own personal benefit (referred to as the "Jaras transaction") after 2009.There was no negligence on the part of GT, in respect of transactions of this type, in its conduct of the 2009 audit.While GT's negligence may have allowed the director to perpetrate this fraud (in the sense thatAssetCo's business was allowed to continue under its existing management from 2009 onwards), this is only "but for" causation.Such losses did not fall within the scope of GT's duty as auditor, because the Jaras transaction did not exist as at 2009 and there was no reason for GT to anticipate it.
Comment
Since the SAAMCO judgment was handed down by the
The Court of Appeal decision in
While claimants may be encouraged by the
From the perspective of auditors, the
Originally published
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