The Gazette 1992

GAZETTE

MARCH 1992

him to accept indirect proof of its existence, and above all he should not rely on the management's internal accounting control system unless there has been a proper inquiry to ascertain the nature of the system, and appraisal of the extent to which reliance can be placed on it and a testing of its operation. 11. Re City Equitable Fire Insurance Co. Ltd. [1925] Ch 407 at 514, per Pollock MR. 12. See for example the history of Xtra- Vision. 13. [1968] Ch 455. 14. [1989] ILRM. 15. Re Kingston Cotton Mills Co. (No. 2) (1896) 2 Ch 279. 16. Stanley L Block Inc -v- Klien 258 NYS 2d 501 (1965). 17. Henry Squire Cash Chemist Ltd. -v- Ball & Baker & Co. (1911) 106 LT 197 at page 204. 18. Ibid. 19. Fox & Son -v- Morrish Grant & Co. (1918) 35 TLR 126. 20. Re Westminister Road Construction and Engineering Co. (1932) 76 Acct LR 38; Re Thomas Gerrard and Son Ltd. [1968] Ch 455, [1967] 2 All ER 525. 21. Hedley Byrne & Co. -v- Heller and Partners [1964] AC 456. 22. Derry -v- Peek (1889) 14 App Case 337. 23. Arehson -v- Casson Beckman Rut ley & Co. [1977] AC 405 [1975] 3 All ER 901. 24. JEB Fastners Ltd. -v- Marks, Bloom & Co. (a firm) [1983] 1 All ER 583. 25. Dutton -v- Bognor Regis Building Co. [1972] 1 QB 373, and Anns -v- Merton London Borough Council [1978] AC 728. 26. For a consideration of this test and its eventual rejection in England see "The Existence of Duty - No Just and Reasonable Test for Ireland?", Muiris Ó Céidigh Irish Law Times May 1990 page 122. 27. [1990] 1 All ER 568. 28. [1991] 1 All ER 134. 29. [1991] 1 All ER 148. 30. For a general consideration of the auditing function see for example 'Current Issues in Accounting' 2nd Edition edited by Bryan Carsberg & Tony Hope, Chapters 6 & 7 - Phillip Allen, 1984. 31. The judgement in Ward -v- McMaster suggests that the Irish courts may continue with the broader Wilberforce test. However, they have not considered matter directly. • YOUR WILL can help

accordance with the company's accounting procedures and a statement by their bank stating that, in their opinion, the forecast had been made with due and careful inquiry. A s a result o f such circulars the plaintiffs increased their bid for the company and it was accepted. T he plaintiffs subsequently alleged that the pre-bid financial statement and profit forecast were negligently misleading and that, had they known the true situation, they would never have bid for the company. T he Court o f App e al held that a duty of care did arise. T he point o f dis- tinction between this case and Caparo was held to be that the statements relied upon were made after the plaintiffs had made their initial bid and not before (it was conceded that no duty was owed before the initial bid was made). T he circulars and they intended that they should rely upon them. It was held to be arguable that for the same reasons, the bank and the accountants owed a duty o f care to the plaintiffs. T he fact that there was a conflict o f interest between the plaintiffs and the target company was not, o f itself, enough to justify the proposition that neither the bank nor the accountants owed to the plaintiffs a duty o f care. It can be argued that such a degree o f proximity should not be required where auditors are involved, given the verification aspect of such a role. 30 Conclusion Caparo and the cases following it, have introduced new limits on liability in respect o f financial mis- statements. This contraction o f liability is taking place in the context o f a narrower test f or negligence being accepted in that jurisdiction. It is not clear that this line will be followed in Irish courts. 31 T he position o f an auditor is that he is fulfilling a role that is important to the statutory system o f corpora- tions and must be distinguished f r om Person making financial statements directors were aware that the plaintiffs would rely upon the

in general. This is particularly so where public companies are involved. It can be argued that, given the perception o f the public as to the role of the auditor, that the duty of care required should be set at a high level and that the decision in Caparo should not be followed in its entirety. • Notes 1. (General) Current Issues in Accounting, Edited by B. Carsberg & T. Hope, Phillip Allen Publishers Limited Second Edition 1984 at page 94. 2. Section 15 of the 1986 Act. 3. Statements of Standard Accounting Practice. In Lloyd Cheyham & Co. Ltd. -v- Littlejohn & Co. [1985] 2 PN 154, Woolf J accepted that SSAPs were very strong evidence of what was the proper standard to be adopted, that a departure from them would be regarded as a breach of duty unless there was some justification, and that third parties in reading the accounts were » entitled to assume that they had been drawn up in accordance with the approved practice unless they had some indication to the contrary. 4. [1896] 2 Ch 279. 5. per Lopes LJ, at page 288. 6. [1895] 2 Ch. 673 (C.A.) 7. Per Lindley L.J. at page 683. 8. [1924] All ER Rep 138. 9. In Fomento (Sterling Area) Ltd. -v- Selsdon Fountain Co [1958] 1 All ER 11, Lord Denning stated: "His vital task is to take care to see that errors be not made, be they errors of computation, or errors of omission or commission, or downright untruths. To perform this task properly he must come to it with an inquiring mind - not suspicious of dishonesty, I agree - but suspecting that someone may have made a mistake somewhere and that a check must be made to ensure that there has been none". 10. Henry Squire Cash Chemist Ltd. -v- Ball, Baker & Co. (1911) 106 LT 197. In the Australian case of Pacific should be made by an auditor. Holding an auditor negligent in failing to check the security for the company's loans he stated that the process of investigation could not be properly carried out except by a procedure that takes into account the possibility that the affairs examined may not be true, due to errors, innocent or fraudulent, appearing in the records. He stated that the auditor should make his own inquiries rather than relying on the company management. The auditor should seek confirmation of the authority claimed by the manager, he should examine any document material to the audit unless it is reasonable for Acceptance Corpn Ltd. -v- Forsyth (1970) 92 WN (NSW) 29 Moffitt J. considered the level of inquiry that

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