Move to increase education in complex insolvency work welcome

Move to increase education in complex insolvency work welcome

December 31, 2007

Ontario Court of Appeal Justice Robert Blair delivered an “extremely well written” judgment in the Livent matter, which may indicate that he anticipates the case to be appealed to the Supreme Court of Canada, Toronto litigator Joel Watson tells Lawyers Weekly.

In Livent Inc. v. Deloitte & Touche, 2016 ONCA 11 the appeal court unanimously upheld a 2014 decision by Ontario Superior Court Justice Arthur Gans, ordering Deloitte & Touche to pay the creditors of defunct theatre entertainment company Livent Inc. more than $118 million in damages, was correct in law, Lawyers Weekly reports.

“In my view, the record amply supports the trial judge’s findings that Deloitte was negligent in its conduct of the 1997 audit and the Q2 and Q3 1997 engagement,” wrote Blair.

Watson, partner with Shibley Righton LLP, says that Blair’s decision contained a critical passage which said: “in accordance with GAAS [generally accepted auditing standards], Deloitte was under an obligation to have proper auditing procedures in place to reduce the risk of not detecting material misstatements to an appropriately low level…Deloitte was retained to…exercise reasonable care in relation to detecting fraud. This is underscored by the fact that Deloitte knew at all material times that the financial statements it prepared were being used to solicit investment in Livent.”

Watson noted that this standard dovetailed with another section of Blair’s ruling, where he referred to a decision by Lord Mance of the House of Lords (now the Supreme Court of the United Kingdom) in 2009:

“I find perceptive Lord Mance’s view in Stone & Rolls…that ‘[i]t would lame the very concept of an audit’ if the auditor could, ‘by reference to the maxim ex turpi causa, defeat a claim for breach of duty in failing to detect managerial fraud at the company’s highest level by attributing to the company the very fraud which the auditor should have detected,’” wrote Blair.

Watson explains that ex turpi causa is a legal doctrine, which means one is not able to sue on the basis of their own criminal conduct, but that both courts found that it did not apply in a situation where the company is suing on the basis of executive fraud that the auditors were hired to detect.

In the article, Watson said that the court told Deloitte it had read that principal incorrectly — auditors cannot use that defence, because they are there to catch fraud, not to rely upon that very fraud to clear them from culpability.