A recent Alberta Court of Appeal decision
regarding standard of care, negligent misrepresentation, and auditor’s
liability involved a rare successful attack on the trial judge’s reasoning for preferring
the evidence of one expert over another.
Factual
Background
Beginning in 2001, Rabobank agreed to
finance Agra by purchasing its receivables. By 2004 the parties had entered into an
agreement requiring Agra to provide audited financial statements to Rabobank. The respondent here was an accounting firm,
Stout & Company LLP, which performed the audits from 2007 to 2010. Agra began to provide false purchase and sale
agreements in 2009, distorting their sales and costs of sales for 2009 and 2010
by at least 25 percent and 40 percent respectively. As a result of the fraud, Rabobank suffered a
loss of over $36 million.
While performing the audits, Stout assessed
the fraud risk as low and the fraud continued undiscovered. Rabobank sued for negligent misrepresentation
alleging it had relied on Stout’s audit opinions in continuing to provide
financing to Agra. It argued that if the
risk had been properly assessed as high, the fraud would have been identified. Rabobank’s expert, Mr. Henry, opined that
Stout’s failure to assess Agra’s fraud risk as high was negligent. Both parties agreed that the audit procedures
were appropriate if the fraud risk had actually been low.
Queen’s
Bench Decision
The initial Statement of Claim named a
multi-national accounting firm as a co-defendant. That firm had purchased Stout assets after
the Agra audits had been concluded. The
multi-national accounting firm, represented by McLennan Ross LLP, successfully
applied for summary judgment and had the case against it dismissed.[1]
At trial, the judge preferred the opinion
of Stout’s expert, Mr. Muccilli, over Rabobank’s expert based on the belief that
Mr. Muccilli had conducted a broader review of the available information, and that
Mr. Henry was influenced by his knowledge of the fraud and the benefit of
hindsight. Based on this preference, the trial judge found that Stout had met
the standard of care expected of an auditor. On a provisional basis only, the trial judge also found that reliance
and damages had been proven by Rabobank.
Court
of Appeal
While there were three grounds of appeal,
the Court of Appeal focused on the trial judge’s alleged error in preferring
Stout’s expert on the standard of care. Stout cross-appealed the trial judge’s assessment of damages and failure
to address Rabobank’s contributory negligence.
The Court of Appeal found that the trial
judge erred in concluding that Stout’s expert had conducted a broader review of
the available information. After
reviewing the evidence, it found there was no justification for inferring a
significant difference between the files reviewed by the experts, particularly
with respect to the relevant documents. This error was found to be a palpable
and overriding error of fact.
As this was the only reason the trial
judge gave for rejecting Mr. Henry’s assertion that Stout should have set the
risk of fraud at high, the Court of Appeal concluded that there was no rational
basis to accept the opinion of one expert over the other. The Court of Appeal was unable to determine
on the evidence whether to accept one expert’s opinion over the other and directed
a new trial.
There was a brief discussion of the
recent Supreme Court decision of Deloitte
& Touche v Livent Inc. (Receiver of), 2017 SCC 63, which expanded the duty of care framework
owed by an auditor. Livent was released after the trial judge gave her decision and
whether it alters the trial judge’s conclusion that a duty of care exists will
be determined in a new trial.
Conclusion
[1] Cooperatieve Centrale Raiffeisen-BoerenleenBank BA (Rabobank
International) v Liebig & Keown LLP, 2016 ABQB 417 (https://www.canlii.org/en/ab/abqb/doc/2016/2016abqb417/2016abqb417.html)
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