409 / 482
GAZETTE
DECEMBER 1989
-v- Boland & Ors.,
unreported,
supra,
the plaintiffs claimed damages for
negligent mis-statement by the
company auditor based on his
failure to detect errors in stock-
taking figures in the company's
audited accounts. The accounts
were used in subsequent negotia-
tions leading to the purchase of the
business assets by the plaintiffs.
Lardner J. cited Woolf J's statement
of the law on auditors' liability in
J.E.B. Fasteners -v- Marks Bloom &
Company,
[1981 ] 3 All ER 289, with
approval. At p. 296 Woolf J. said:-
" W i t h o u t laying down any
principle which is intended to be of
general application on the basis of
the authorities which I have cited,
the appropriate test for establishing
whether a duty of care exists,
appears in this case to be whether
the defendants knew or reasonably
should have foreseen at the time the
accounts were audited that a per-
son might rely on those accounts
for the purpose of deciding whether
or not to take over the company and
therefore could suffer loss if the
accounts were inaccurate. Such an
approach does place limitations on
those entitled to contend that there
has been a breach of duty owed to
them. First of all, they must have
relied on the accounts and, second,
they must have done so in circum-
stances where the auditors either
knew that they would be relying on
their accuracy or ought to have
known that they might."
The longer the period that has
elapsed between the audit and the
time that reliance was placed upon
the audited accounts, the more diffi-
cult it will be for a plaintiff to
establish that the auditor ought to
have foreseen that his certificate
would be relied upon.
In
Kelly -v- Boland and Ors.,
the
auditor was aware of an imminent
sale of the business when he
audited the 1976 Accounts. Lardner
J. was also of the opinion that when
the 1975 audit was conducted, the
auditor ought, in the light of his
knowledge at the time, to have
foreseen that reliance might be
placed on the accuracy of the
accounts in a subsequent sale of
the business and assets of the
company. The company was in
financial difficulties at the time.
Lardner J. dismissed the plaintiffs'
claim in relation to the ' 73 and ' 74
audits.
Although Mr. Justice Lardner
found that, having regard to the
professional standards prevailing at
the time of certification, the audit-
ors were negligent in failing to
ensure the accuracy of the stock-
taking figures by attending at and
observing the stocktaking exercise,
he nevertheless held against the
plaintiffs. He held the plaintiffs had
failed to prove that any inaccuracies
in the figures for stock had misled
them as to the profits and losses for
the years ' 75 and '76.
In a claim for negligent mis-
statement, it is therefore clearly not
sufficient to prove that there were
inaccuracies in the audited
accounts and that the auditor was
negligent in failing to detect them.
It must further be proved that the
plaintiff relied upon the accuracy of
the accounts, and such reliance was
foreseeable and further that the
plaintiff suffered economic loss as
a result. In
J.E.B. Fasteners -v- Marks
Bloom & Company,
supra, the
plaintiffs proved the auditors had
been negligent in conducting the
audit and t hat the company
accounts had given a false and
misleading impression of the
company's financial position. The
plaintiffs pleaded reliance on the
audited accounts in their takeover of
the company, but Woolf J. refused
the plaintiffs' claim for damages
concluding that even if the plaintiffs
had known " t he true financial
position of the company at the
time" they would not have acted
any differently and consequently
they had failed to establish a
sufficient nexus between the
auditor's negligence and their
economic loss.
The recent case of
Caparo
Industries pic -v- Dickman and Ors.
[1989] 2WLR 316 shows a further
development of the law in this area.
The English Court of Appeal in a
2:1 decision (O'Connor, Bingham
and Taylor
L.JJ.) re-examined the
role of the statutory auditor in the
particular context of a public limited
company. Lord Justice Bingham
stated the primary duty in and about
the preparation of the company's
annual accounts rests with the
directors. The auditor's role, he said,
was secondary and accessory, his
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