JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (A Firm)

Judgment Date06 December 2006
Date06 December 2006
Docket NumberSuit No 874 of 2004
CourtHigh Court (Singapore)
JSI Shipping (S) Pte Ltd
Teofoongwonglcloong (a firm)

[2006] SGHC 223

Lee Seiu Kin J

Suit No 874 of 2004

High Court

Companies–Auditors–Duties–Plaintiff-company suing auditor for failing to detect company director's misappropriation of company funds through overpayment of director's salary and other benefits–Auditor verifying information relating to director's salary by relying on statement of by defaulting director–Whether defendant failing in duties as plaintiff's auditor and breaching contract of engagement with plaintiff–Sections 205, 207 Companies Act (Cap 50, 1994 Rev Ed)

The defendant-firm was engaged, via an audit contract, to act as the plaintiff-company's auditors. The defendant expressed an unqualified opinion on the plaintiff's financial statements in all three audits performed.

In the course of the audits, the defendant was unable to obtain the employment contract of one of the plaintiff's two directors (“Riggs”). The defendant approached Riggs who suggested that the defendant obtain confirmation from the other director (“Cullen”). The defendant eventually accepted Riggs' suggestion that Cullen's approval by his signature on the draft financial statements would constitute approval of Riggs' remuneration package. It was Cullen who signed the directors' report in the plaintiff's annual report. It was later discovered that Riggs had been misappropriating the plaintiff's funds through means including the overpayment of his salary and other benefits.

The plaintiff claimed damages for breach of contract in that the defendant had failed in its duty as auditor to identify abuse of the plaintiff's funds by Riggs. The plaintiff claimed, in the alternative, that the defendant had breached its duty of care to the plaintiff in respect of the express and implied terms of the audit contract.

Held, dismissing the claim:

(1) The duties of an auditor were governed by the contract of engagement. The terms of engagement had to be seen in the light of ss 205 and 207 of the Companies Act (Cap 50, 1994 Rev Ed): at [62] and [64].

(2) In fulfilling his duties under s 207, the auditor had to use reasonable skill, care and caution. What amounted to reasonable care depended on the circumstances of each case. An auditor's role was one of verification and not detection. In the absence of the suspicion of any fraud, the question was whether there was a want of reasonable care on the part of the auditors. An auditor's duty was to take care that errors were not made. To perform this task, an auditor needed to have an inquiring mind; not one suspicious of dishonesty, but one suspecting that someone may have made a mistake somewhere. Breaches of duty were to be determined in the light of professional practice: at [65]to [68].

(3) The defendant was entitled to rely on representations by Riggs and the plaintiff's accounting manager in seeking verification of Rigg's own remuneration as there was no reason to doubt either of them. It would have been very onerous and beyond the scope of engagement to impose a duty on the defendant to contact Cullen: at [72].

(4) In any event, the defendant did obtain Cullen's signature on the director's report. The defendant was entitled to rely on the directors' statements in the absence of evidence of dishonesty or fraud. Moreover, the defendant was seeking to rely on the directors' statements to confirm only an aspect of the audit and not the entire audit: at [73] to [75].

Bolam v Friern Hospital Management Committee [1957] 1 WLR 582 (refd)

City Equitable Fire Insurance Company,In re [1925] Ch 407 (folld)

Deputy Secretary v Das Gupta [1956] AIR 414 (distd)

Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd [1958] 1 WLR 45 (folld)

Kingston Cotton Mill Company (No 2),In re [1896] 2 Ch 279 (folld)

Leeds Estate, Building and Investment Company v Shepherd (1887) 36 Ch D 787 (distd)

Lloyd Cheyham & Co Ltd v Littlejohn & Co [1987] BCLC 303 (folld)

London and General Bank (No 2),In re [1895] 2 Ch 673 (folld)

Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 (distd)

United Project Consultants Pte Ltd v Leong Kwok Onn [2005] 4 SLR (R) 214; [2005] 4 SLR 214 (folld)

Companies Act (Cap 50,1994 Rev Ed)ss 205, 207 (consd);ss 199,201, 402

Alan Loh and Edgar Chin (Kelvin Chia Partnership) for the plaintiff

R Chandra Mohan, Celia Sia and Melvin Lum (Rajah & Tann) for the defendant.

Judgment reserved.

Lee Seiu Kin J

1 The defendant is a firm of certified public accountants in Singapore and was engaged to act as the plaintiff's auditors during the material time. In this suit the plaintiff claims damages for breach of contract in that the defendant had failed in its duty as auditor to identify abuse of the plaintiff's funds by one John Riggs (“Riggs”), a director of the plaintiff at the material time. The plaintiff's alternative claim is that the defendant had breached its duty of care to the plaintiff in respect of the express and implied terms of the audit contract.

The plaintiff

2 The plaintiff was incorporated on 26 September 1998 under the name “Ten-Up International Pte Ltd” which was subsequently changed to its present name. They carry on the business of providing freight-forwarding and other related services. Although the plaintiff had two directors at the material time, Riggs was based in Singapore while the other director, James Cullen (“Cullen”), was resident in California. Cullen was also a director and the major shareholder of the plaintiff's ultimate holding company, JS International Shipping Corporation (“JSISC”) which was incorporated in California. JSISC is the parent of the plaintiff's holding company, Cranberry Gold, which was incorporated in the British Virgin Islands.

3 JSISC had its origins in a sole proprietorship established in 1983 by Cullen and which he incorporated as a company in 1986. JSISC provides international logistics and door-to-door freight-forwarding services to its customers who are mainly based in the United States. It has four branches in the US, namely in Austin, Boston, Los Angeles and Portland, with the corporate office in Burlingame, California. JSISC also operates in Taiwan, Hong Kong and China. For its freight-forwarding operations in Singapore, JSISC previously used local agents. These agents would invoice JSISC, who would in turn invoice its own customers with a mark-up. However, with an increased volume of business in Singapore, JSISC considered that it made business sense to incorporate a local subsidiary. The plaintiff was accordingly incorporated on 26 September 1998. The bulk of the plaintiff's business came from JSISC's customers in the US and it was not a priority to establish a customer base in Singapore. There were no sales or revenue targets for the plaintiff to achieve. By way of comparison, JSISC's average annual turnover from 1999 to 2002 was approximately US$30m worldwide. The plaintiff's turnover in Singapore was $2.5m in 1999, and $7.3m for 2000 and 2001.

4 Cullen's evidence in relation to how Riggs was engaged was not disputed. Cullen said that to minimise cost, he decided to engage a director in Singapore (rather than employ somebody from the US on expatriate terms) to head the plaintiff as well JSISC's Asia operations. Riggs, who was introduced to Cullen by one of JSISC's agents sometime in 1997 or 1998, seemed to fit the requirements for the job and was engaged sometime at the end of 1998 as the plaintiff's Asia director.

The defendant

5 The defendant is a full-service public-accounting practice. The services that it provided include statutory auditing, special auditing, accounting, tax, corporate advisory services, litigation support, due-diligence review, initial public offerings (“IPO”), liquidation, receivership and judicial management. At the material time, the defendant was a member of the same organisation, NEXIA, as JSISC's auditors in California. The defendant conducted three statutory audits of the plaintiff's accounts: these were in respect of financial years (“FY”) 1999, 2000 and 2001. All three audits were unqualified.

Riggs' malfeasance

6 In June 2002, Cullen received an anonymous letter informing him that Riggs, together with two other employees of the plaintiff, were involved in a scheme to siphon funds from the plaintiff through a company called Starwin Century (S) Pte Ltd (“Starwin”). The letter also alleged that Riggs was using the plaintiff's funds for his personal expenses. Cullen made two trips to Singapore to investigate the matter. In his second trip he was satisfied that Riggs had siphoned funds from the plaintiff and terminated Riggs' employment sometime in June. Cullen discovered that it was the plaintiff's office manager, Laili Ya'akub (“Laili”) who had sent the anonymous letter. Laili explained that around January 2002 she had noticed certain questionable matters concerning Riggs and conducted a discreet investigation. She had only managed to gather sufficient evidence by June but, fearing for her employment as Riggs was the most senior person in Singapore, she decided to send an anonymous letter to Cullen.

7 Riggs left Singapore shortly after he was sacked. In early July 2002 the plaintiff engaged the services of the auditing firm of M/s Ng, Lee & Associates-DFK (“NLA”) to conduct a special audit to uncover the full extent of Riggs' malfeasance. The initial audit initially covered the period 1 January 2001 to 30 June 2002. This was completed and a report put up on 5 August 2003. The plaintiff filed the writ in this action on 29 October 2004. In September 2005, NLA was instructed to carry out a special audit for the period September 1998 to December 2000. NLA completed the report for this second special audit on 8 February 2006.

8 In its “First Special Audit Report”, NLA stated that Riggs had misappropriated company funds totalling $1.808m over the period January 2001 to June 2002. These...

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