AUDITOR’S STATEMENTS: SAFEGUARD OR SNARE?

• Published date: 01 December 1993
• Date: 01 December 1993
• Citation: (1993) 5 SAcLJ 355
• Author: TER KAH LENG

Ikumene Singapore Pte Ltd & Ronald Walter Fairlamb v Leong Chee Leng [1993] 3 SLR 24

What is the purpose of audited accounts under the Companies Act? Who may rely on the auditor’s report and bring an action for negligent misstatement? These questions arose for the first time before the Singapore Court of Appeal. Ikumene is significant not merely because it is the first case of its kind but because of its implications on the law relating to negligent misstatements in Singapore. It gave the Court of Appeal the opportunity to affirm recent significant developments in English law relating to negligent misstatements and to adopt these into Singapore law. What was previously highly persuasive is now binding on Singapore courts. Ikumene not only clarifies the current position but also indicates the likely trend of development in this important area of the law. It is important because negligent misstatements are capable of creating indeterminate liability and indeterminate losses. Should the law protect the profession or persons who have relied on audited statements and suffered vast financial losses? Is the auditor’s report to be a safeguard or a snare to those relying on it? This case-note attempts to deal with these questions.

The Facts

Ikumene (P1) was set up in 1978 by three persons, one of whom was Fairlamb (P2), for the purpose of trading in medical and surgical equipment. P2 had invested $47,000 in the company and was the majority shareholder and a director. P2 gave a guarantee in respect of credit facilities granted by a bank to P1 and charged, by way of security, his personal fixed deposit with the bank. The defendant (D) was the auditor of the company and audited the accounts for the year ending 31 December 1979, 1980 and 1981. The 1979 and 1980 audited accounts showed accumulated losses. The 1981 accounts showed a profit, thus reducing these accumulated losses. P2 was pleased as he thought that the company had turned around. In respect of these accounts, D stated that the accounts were properly drawn up in accordance with the Companies Act and gave a true and fair view of the state of affairs of the company. In 1983, P2 received a copy of the letter of demand for payment from the bank to P1. P2 engaged a firm of professional accountants to investigate the accounts of P1. They reported that certain accounting records were missing and that in their opinion the 1979 accounts did not give a true and fair view. In 1984, P2 received a letter of demand as guarantor. Shortly after, the bank set-off P1’s debt amounting to $201,338.61 against P2’s fixed deposit.

The plaintiffs brought an action in the High Court alleging that D was in breach of duty when she gave an unqualified audit opinion and when she

ought to have known that each of the three sets of accounts did not give a true and fair view of the state of affairs of P1. The plaintiffs further alleged that had D discharged her duties faithfully, they would have changed the managing director of P1 and would have at an early stage taken steps to investigate and improve the financial position or minimised the losses of P1. D did not call any evidence in defence, but merely submitted that the plaintiffs had not made out a case against her.

Judgment of the High Court

The learned judge found that D had been negligent in auditing the accounts of P1 but owed no duty of care to P2...