Gaelic Inns Pte Ltd v Patrick Lee PAC

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 29 January 2007
• Neutral Citation: [2007] SGHC 13
• Docket Number: Suit No 531 of 2005
• Date: 29 January 2007
• Published date: 31 January 2007
• Year: 2007
• Plaintiff Counsel: Philip Fong, Navin Joseph Lobo and Tan Ai Lin (Harry Elias Partnership)
• Citation: [2007] SGHC 13
• Defendant Counsel: Cecilia Lee Hendricks and Russel Low (Kelvin Chia Partnership)
• Court: High Court (Singapore)
• Subject Matter: Negligence,Whether auditor owing company duty of care to detect such fraud,Whether such fraud rendered possible by neglect and want of professional skill of auditor of company,Whether company contributorily negligent for loss suffered,Nature and scope of auditor's duty of care,Company employee perpetrating fraud on company over period of three financial years thereby causing company to suffer loss,Tort,Company's auditor failing to detect such fraud when auditing company's accounts,Duty of care,Whether auditor breaching such duty of care

29 January 2007

Belinda Ang Saw Ean J:

1 In this action, the plaintiff, Gaelic Inns Pte Ltd (“GIPL”), claimed damages of close to $1 million for negligence in respect of audits carried out by the defendant, Patrick Lee PAC between 2002 and 2004. It was alleged that Denise Ang (“Denise”), the plaintiff’s former group finance manager, was able to misappropriate the plaintiff’s funds for her own benefit without detection and that was rendered possible by the neglect and want of professional skill of the defendant as auditor of the company.

2 On 15 December 2006, I delivered a lengthy oral judgment covering the main grounds of my decision for allowing the plaintiff’s claim in the sum of $775,266.02 with interest thereon at the rate of 6% per annum from the date of the writ and costs. The defendant has appealed against my decision. I now set out in full the reasons for my decision.

The pleaded complaint and defence

3 The overall complaint by the plaintiff was that the defendant failed to detect Denise’s cash misappropriations during the audit of the accounts for the financial years ending 31 December 2001 (“FY 2001”), 31 December 2002 (“FY 2002”) and 31 December 2003 (“FY 2003”). As a result, Denise was able to misappropriate the plaintiff’s monies without detection until the plaintiff was alerted of her misdeeds by Maggie Seah (“Seah”), the payroll and administration manager, who raised the alarm on 24 May 2004.

4 Specifically, the matters giving rise to the common law duty to exercise the care and skill of competent auditors in relation to the audit of financial statements were (at least primarily) those set out under paragraphs 3 to 6 of the Statement of Claim. The pleaded case in paragraph 7 of the Statement of Claim was that in preparing and purporting to audit the plaintiff’s financial statements for the FY 2001, FY 2002 and FY 2003 respectively and in providing audit reports in respect of the FY 2001 and FY 2002, the defendant acted in breach of the duty of care which it owed to the plaintiff. Particulars of the breach of duty included a failure to detect the cash misappropriations by Denise for the FY 2001, FY 2002 and FY 2003 respectively[note: 1]. In paragraph 7(c) of Statement of Claim, the plaintiff referred to the defendant’s failure to raise any queries and/or make recommendations in respect of irregularities in the plaintiff’s financial statements and accounting and other records, including but not limited to the failure to raise any queries about the inordinate time lapses between the receipt of cash and its lodgement with the bank. Paragraph 7(d) of the Statement of Claim was on the defendant’s failure to raise any queries and/or make recommendations in respect of irregularities in the accounting, banking and/or cash practices thereby breaching the Singapore Standards of Auditing (SSA) including but not limited to SSA 6, 8, 21 and 25. Paragraph 7(e) of the Statement of Claim was on the defendant’s failure to take care in and about auditing the plaintiff’s accounts despite full knowledge that most of the plaintiff’s business was transacted in cash, including but not limited to the failure to carry out physical verification of cash takings against the plaintiff’s bank reconciliation statements. More generally, it was alleged that the financial statements for the FY 2001 and the FY 2002 respectively failed to show a true and fair view of the plaintiff’s affairs; that contrary to the position represented in the auditor’s reports, proper books of account were not kept and internal reporting systems and management controls had weakness.

5 According to the plaintiff, the misappropriations straddled three financial years beginning with the FY 2001 and continuing right through to the FY 2003 and beyond to 24 May 2004. The total amount stolen over this period of time was allegedly $1,006,115.19. Through teeming and lading, Denise was able to cover up prior cash misappropriations and to continue stealing in the manner explained in the further and better particulars filed by the plaintiff on 1 February 2006[note: 2]:

[Denise] delayed banking cash received on the day of sales into the plaintiff’s bank account and used the cash for her personal benefit. The cash used was replaced subsequently with cash received from the plaintiff’s subsequent sales.

6 Separately, in or about May 2002, Denise passed false journal entries in the accounts to reduce the sales figure by $71,332.37 thereby reducing the cash that was supposed to be deposited into the plaintiff’s bank account. Counsel for the plaintiff, Mr Philip Fong, confirmed that it was not the plaintiff’s case that the defendant ought to have detected the unlawful journal adjustments. The complaint was the defendant’s failure to detect Denise’s cash misappropriations during the FY 2001 audit enabled Denise to misappropriate a further sum of $71,332.37. At the date of the writ, the plaintiff already succeeded in recouping from Denise the sum of $8,929 and an additional sum of $100,000 from its insurers. The plaintiff sought to recover from the defendant the remaining balance quantified at $968,508.56. The claim was advanced on the footing that for past losses, the plaintiff lost the chance of recovering from Denise the moneys misappropriated. In addition, if alerted of her misdeeds, further misappropriations would have been averted.

7 The defendant strenuously refuted all allegations of negligence. The defendant denied any negligence in signing the audit reports for the FY 2001 and FY 2002. The audits were carried out in accordance with the Singapore Standards on Auditing. The losses in the FY 2001, FY 2002 and FY 2003, if any, were not attributable to any negligence on the part of the defendant.

8 The defendant pointed out that the misappropriation of funds occurred from the period 29 March 2003 to 24 May 2004 and not earlier. As such, there were no losses in the FY 2001 and FY 2002. As for the FY 2003, the plaintiff terminated the defendant’s services without formal representation before completion of the audit of the plaintiff’s financial statements for the FY 2003. The defendant ceased to be the statutory auditor for the plaintiff on 11 October 2004. Prior to termination, the defendant was hindered in the performance of its duties and exercise of its powers as statutory auditor. In particular, the plaintiff had effectively ignored the defendant’s repeated requests for bank statements and information on the clearance dates of the sum of $672,253.94 being the amount of cash sales in the schedule to the plaintiff’s bank reconciliation statement as at 31 December 2003 under the column headed “uncredited lodgements”. Instead, the plaintiff instructed the defendant on 10 June 2004 to hold in abeyance the audit pending further instructions. All these matters forestalled discovery of Denise’s cash misappropriations in the FY 2003. I should mention that the terminology “uncredited lodgements” related principally to cash sales items (prefixed CFS) followed by a number as distinct from “unpresented cheques” listed down under a separate column in the schedule to the plaintiff’s monthly bank reconciliation statements. That much was clear. I interpose to mention that Lawrence Phong Wai Lee (“Phong”), the audit manager, in his affidavit of evidence-in-chief, referred to those CFS items as “unlodged cash deposits”. As to what the terminology “uncredited lodgement” was meant to convey, it was capable of two interpretations. Some like Ian M Crowhurst (“Crowhurst”), the plaintiff’s former managing director and the audit partner, Tow Juan Dean (“Tow”) thought it represented cash sales deposited into the plaintiff’s bank but not showed as credited as at 31 December 2003. Others like Seah and Phong, understood it to represent cash sales not yet deposited into the plaintiff’s bank account as at 31 December 2003. I should mention that as the arguments developed (and I will explain later) it was not necessary for me to express a view as to which of the two interpretations was intended.

9 By way of counter argument, the defendant alleged that the plaintiff was negligent in failing to put in place internal controls to prevent or detect the cash misappropriations by Denise. The defendant contended that it was the plaintiff’s responsibility to establish appropriate internal controls to, inter alia, ensure adherence to management policies, the safeguarding of assets including the prevention and detection of fraud and error in the company. In support of that assertion, the defendant relied on the experience and qualification of the directors and the engagement of specialist consultants to implement the plaintiff’s internal control systems. Apart from that the defendant relied upon the representation letters issued by the plaintiff to the defendant whereby it was, inter alia, represented to the statutory auditor that there were no irregularities involving management or employee who had a significant role in the system of internal control; that the financial statements were free of material errors and omissions. Consequently, as pleaded in paragraph 16 of the Amended Defence, the loss and damage, if any, was caused solely by the plaintiff or, in the alternative, was contributed to by the plaintiff in failing to practise good corporate governance and to maintain effective management practices to prevent or detect the presence and perpetration of fraud by Denise.

10 I should mention at the outset that both parties referred to and in some instances relied upon the special reports prepared by Raffles Corporate Consultants Pte Ltd (“RCC”). Authenticity of the latter’s reports was agreed between the parties but not the truth of the contents. Yet, nobody from that organisation was called as a witness. As such, I disregarded as hearsay aspects of the reports which the parties relied upon in support of the points they each made.

The law

The nature and scope of an auditor’s...