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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
directors were aware that the
plaintiffs would rely upon the
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
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
Acceptance Corpn Ltd.
-v-
Forsyth
(1970) 92 WN (NSW) 29 Moffitt J.
considered the level of inquiry that
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
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.
•
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