JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a firm)

• Jurisdiction: Singapore
• Judge: Chan Sek Keong CJ
• Judgment Date: 30 August 2007
• Neutral Citation: [2007] SGCA 40
• Docket Number: Civil Appeal No 1 of 2007
• Date: 30 August 2007
• Published date: 31 August 2007
• Year: 2007
• Plaintiff Counsel: Loh Yong Kah Alan and Edgar Chin (Kelvin Chia Partnership)
• Citation: [2007] SGCA 40
• Defendant Counsel: R Chandra Mohan, Celia Sia, Melvin Lum and Khoo Yuh Huey (Rajah & Tann)
• Court: Court of Appeal (Singapore)
• Subject Matter: Negligence,Sections 205, 207 Companies Act (Cap 50, 1994 Rev Ed),Extent of loss attributable to auditor's negligence,Whether auditors' negligence effective cause of company's loss and loss of chance to discover fraud,Applicability of relevant auditing standards of governing professional body,Duties,Contributory negligence,Tort,Relief via s 391 Companies Act or plea of contributory negligence dependent on circumstances of case and different threshold requirements,Causation,Whether auditors obtained independent verification and reasonable assurance,Duty of care,Companies,Whether auditors failed to act honestly, reasonably and in good faith,Attribution of fault between directors and auditors based on respective culpability,Whether auditors acted honestly, reasonably and in good faith,Section 391 Companies Act (Cap 50, 1994 Rev Ed),Standard required under contract, statutes or regulations,Weight to be attributed to expert evidence relating to conduct of audit,Auditors

30 August 2007 Judgment reserved.

V K Rajah JA (delivering the judgment of the court):

Introduction

1 This judgment clarifies and restates the law of professional negligence in the context of statutory audits. More specifically, it evaluates the standard of care expected of an auditor in relation to the objective verification of relevant financial particulars and discusses the principles of causation applicable in a claim for damages against auditors.

The facts

Dramatis personae

2 The appellant carries on the business of providing freight-forwarding and other related services. At the material time, its only two directors were John Peake Riggs (“Riggs”), who was based in Singapore as Asia Director, and James Glenn Cullen (“Cullen”), who resided in California and headed JS International Shipping Corporation (“JSISC”), the ultimate holding company of the appellant.

3 JSISC is engaged in the business of providing international logistics and door-to-door freight-forwarding services to its mainly US-based customers. For its freight-forwarding operations in Singapore, JSISC initially engaged local agents who would invoice JSISC, which in turn would invoice its customers with a mark-up. Subsequently, burgeoning business in Singapore made it more economical to incorporate a local subsidiary, resulting in the incorporation of the appellant on 26 September 1998 and, shortly thereafter, the engagement of Riggs to head the appellant as well as to oversee JSISC’s Asia operations.

4 As Asia Director, Riggs had overall control and responsibility of the appellant’s day-to-day operations in Singapore and reported to Cullen on all operational and business issues. Cullen was also the only person who decided on and was privy to Riggs’ remuneration and employment terms in Singapore. Russ Peter Hora (“Hora”), a trained accountant and JSISC’s then director of finance, assisted Cullen on financial matters, including those of the appellant. Hora was instructed by Cullen to monitor the appellant’s monthly management accounts regularly and report to Cullen if there was something amiss with the accounts. The appellant’s accounting manager, Sandy Wah (“Sandy”), prepared the monthly management accounts detailing the appellant’s expenses.

5 The respondent is an established firm of Singapore certified public accountants which provides services including statutory auditing, special auditing, accounting, tax and corporate advisory services. At the material time, the respondent was a member of the same organisation, NEXIA, as JSISC’s auditors in California.

Terms of the respondent’s engagement

6 The respondent conducted three statutory audits of the appellant’s accounts in respect of financial years (“FYs”) 1999, 2000 and 2001. All three audits were unqualified. The material terms of engagement were encapsulated in a letter of appointment dated 26 March 1999 and a letter of consent dated 8 July 1999, which provided as follows:

Our audit will be made in accordance with the requirements of Section 207 of the Companies Act, Cap. 50, with the objective of expressing an opinion on the accounts.

In forming our opinion on the accounts, we will perform sufficient tests to obtain reasonable assurance as to whether the information contained in the underlying accounting records and other source data is reliable and sufficient as the basis for the preparation of the accounts. We will also decide whether the information is properly communicated in the accounts. In this regard, we will disclose significant deviation if the accounts do not comply with the Statements of Accounting Standard issued by the Institute of Certified Public Accountants of Singapore.

Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any system of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered. Accordingly, our audit should not be relied on to disclose fraud, defalcations or other irregularities. However, if they exist, their disclosure may result from the audit tests we undertake. We shall report to you any such matters and any material weaknesses in the system of accounting and internal control which come to our notice and which we think should be brought to your attention.

The Companies Act provides that the responsibility for the preparation of the accounts including adequate disclosure is that of the directors. This includes the maintenance of adequate accounting records and internal controls, the selection and application of accounting policies, and safeguarding of the assets of the Company. As part of our audit process, we will request from the directors written confirmation concerning representations made to us about the audit.

The Companies Act provides that we shall have a right of access to the accounting and other records including registers of the Company. In addition, we have access to such information and explanations as we require for the purposes of our audit. In this connection we look forward to full co-operation with your staff.

[emphasis added]

7 These terms are very similar to the template provided in Appendix 2 of the Singapore Standard on Auditings (“SSAs”) published by the Institute of Certified Public Accountants of Singapore (“ICPAS”) in 1996, except that the respondent acknowledged an additional express duty (italicised above) to report material weaknesses in the system of accounting and internal control which came to its notice. The respondent accepted re-appointment on the same terms for the statutory audit of the appellant’s accounts for the FYs ending 31 December 2000 and 2001.

Riggs’ malfeasance

8 In or around May 2002, Cullen received an anonymous letter (subsequently ascertained to have originated from the appellant’s office manager, Laili Bte Ya’akub (“Laili”)), which imputed that Riggs and a few other employees were unlawfully engaging in a competing business with the appellant as well as privy to a scheme to fraudulently siphon off funds. The letter also notified Cullen that Riggs had been using company funds for his own personal expenses without Cullen’s knowledge or authority. Laili subsequently testified that around January 2002, she had noticed certain questionable transactions involving Riggs and had conducted a discreet investigation. She took a few months to gather sufficient evidence and decided to act anonymously as she feared for her job security, given that Riggs was the most senior person in Singapore.

9 Cullen subsequently made two trips to Singapore. After his second trip, he was satisfied that Riggs had misused funds belonging to the appellant. He confronted Riggs. This eventually culminated in Riggs’ resignation on 21 June 2002. Riggs later confessed to the misappropriations in a note dated 28 June 2002. In the meantime, a police report was lodged with the Commercial Affairs Department.

10 In early July 2002, the appellant engaged Ng Lee & Associates – DFK (“NLA”) to conduct a special audit to ascertain the full extent of Riggs’ malfeasance. In its first special audit report dating from 1 January 2001 to 30 June 2002, NLA stated that Riggs had misappropriated company funds amounting to $1.808m during the relevant period. These misappropriations comprised personal expenses charged as director’s benefits without board approval, unsubstantiated travelling expenses, doubtful charges for office renovation, fictitious payments to a company controlled by Riggs and the unauthorised issuance of numerous cash cheques for fictitious transactions.

11 A second special audit report dating from September 1998 to December 2000 was subsequently commissioned. It revealed that there was an overpayment of salary for Riggs amounting to $18,000 during the stated period. The report also stated that he had received non-approved sums of money for allowances and other benefits amounting to about $174,000. These figures were, however, altered several times during the proceedings as additional documents inconsistent with some of the initial findings surfaced.

The proceedings below

12 At first instance, the appellant claimed that all its losses were caused by the respondent’s breaches of its contractual obligations and duty of care in relation to the three audits which it carried out for FYs 1999, 2000 and 2001. These breaches were alleged to have taken place in three critical areas:

(a) Although the respondent had been in substantial doubt as to Riggs’ entitlement to the amount of salary and benefits attributed to him as director’s remuneration, it failed to obtain sufficient appropriate audit evidence to remove such doubt. Alternatively, the respondent had not planned and performed its audits in 1999, 2000 and 2001 with the required attitude of professional scepticism.

(b) The respondent had failed to express a qualified audit opinion or a disclaimer that would serve to document or highlight the limitation of the scope of its audit and the existence of any factors which prevented it from obtaining sufficient appropriate audit evidence.

(c) The respondent had failed to issue a management letter or internal control report to advise the plaintiff that there was a practice of:

(i) splitting payment of invoices of more than $12,000 to circumvent the single cheque signatory limit;

(ii) signing of blank cheques; and

(iii) having large prepayment accounts comprising transactions that had no substantiating documents,

thereby breaching its contract and duty to bring to the appellant’s attention material weaknesses in the system of accounting and internal control that had come to its notice.

13 The respondent’s case at first instance was that it had carried out all three audits in accordance with the requirements of s 207 of the Companies Act (Cap 50, 1994 Rev Ed) (“CA”) and the SSAs. The respondent contended that in undertaking these audits, it had, in accordance with the SSAs:

(a) planned and performed the audit with a...