PlanAssure PAC (formerly known as Patrick Lee PAC) v Gaelic Inns Pte Ltd

• Jurisdiction: Singapore
• Judge: Chan Sek Keong CJ
• Judgment Date: 30 August 2007
• Neutral Citation: [2007] SGCA 41
• Date: 30 August 2007
• Subject Matter: Duty to detect fraud,Auditors,Causation,Contributory negligence,Evidence,Section 3(1) Contributory Negligence and Personal Injuries Act (Cap 54, 2002 Rev Ed),Admission by accused not binding on parties not involved earlier,Importance of fact-specific approach,Negligence,Professions,Admissibility of evidence,Whether auditor owing duty to detect fraud,Tort,Whether loss to company caused by auditor's breach,Appropriate quantum of damages company entitled to,Duty of care,Whether auditor breached duty in performance of audit,Absence of reckless or deliberate conduct breaking chain of causation,Professional standards in auditing,Relevance of admission made in criminal proceedings,Accountants and auditors,Broad brush assessment
• Docket Number: Civil Appeal No 2 of 2007
• Published date: 31 August 2007
• Defendant Counsel: Philip Fong, Navin Joseph Lobo and Bernice Tan (Harry Elias Partnership)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Ang Cheng Hock and Kenneth Lim Tao Chung (Allen & Gledhill)

30 August 2007 Judgment reserved.

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

1 This is an appeal by PlanAssure PAC (previously known as Patrick Lee PAC) (“the appellant”) against the decision of the trial judge awarding judgment to Gaelic Inns Pte Ltd (“the respondent”) for the sum of $775,266.02 as damages for negligence in respect of audits performed by the appellant (see Gaelic Inns Pte Ltd v Patrick Lee PAC [2007] 2 SLR 146 (“GD”)).

2 Having heard and carefully considered the submissions of the respective parties, we have decided to allow the appeal in part. We now set out the reasons for our decision.

The facts

3 The appellant is a firm of certified public accountants and was established in 1974 under the name of Patrick Lee & Co. The appellant’s partnership was converted to a public accounting corporation incorporated under the Companies Act (Cap 50, 1994 Rev Ed) (“CA”) in 2002.

4 The respondent is engaged in the business of owning and operating, inter alia, pubs in Singapore.

5 The appellant was engaged by the respondent as its statutory auditors to audit the respondent’s accounts for the financial years (“FYs”) of 2001, 2002 and 2003. The audit required the appellant to comply with the terms of s 207 of the CA, and express an opinion as to whether the respondent’s financial statements gave a true and fair view of its profit and loss.

6 Pursuant to this, Tow Juan Dean (“Tow”), a director of the appellant and a qualified practising accountant, was assigned to be the statutory auditor in charge of the audit of the respondent’s financial statements. Tow was assisted by Phong Wai Lee (“Phong”), who was employed as an audit manager of the appellant but who was not a qualified practising accountant.

7 The yearly audits for FYs 2001 and 2002 were completed without incident. Thereafter, the respondent retained the appellant’s services to conduct the yearly audit for FY 2003.

8 Three directors sat on the respondent’s board of directors at the material time of the various audits for FYs 2001, 2002 and 2003:

(a) Ian Crowhurst (“Crowhurst”), managing director;

(b) Charles Lew Foon Keong (“Lew”), non-executive director; and

(c) Shaw Hui Jeong (“Shaw”), non-executive director.

9 Between 2001 to 2004, Denise Ang (“Ang”), the respondent’s former group finance manager, devised and carried out a scheme whereby she delayed banking in cash on the day of sales into the respondent’s bank account, and instead used the cash for her personal benefit. To make up for the resulting shortfall, Ang would bank in an equivalent amount of cash subsequently collected from later sales. For a period of time, Ang managed to avoid detection because she would subsequently bank in the same amount of money that she had taken out. This method of misappropriation is usually described in accounting parlance as “teeming and lading”.

10 Ang’s misappropriation of funds was eventually detected by the respondent’s payroll and administration manager, Maggie Seah (“Seah”), on 24 May 2004. Ang has since been charged with and convicted on three counts of criminal breach of trust under s 408 of the Penal Code (Cap 224, 1985 Rev Ed). Six other similar charges were taken into consideration. The total sum misappropriated was $1,006,115.12. To date, the respondent has recovered from Ang the paltry sum of $8,929 and an additional sum of $100,000 from its insurers.

11 In July 2005, the respondent commenced the present suit against the appellant, in which it seeks damages of close to $1m for negligence in respect of the audits performed by the appellant between 2002 and 2004. The crux of the respondent’s case is that the appellant failed to detect Ang’s cash misappropriations during the audit of the accounts for FYs 2001, 2002 and 2003, thereby emboldening and enabling Ang to continue with her misappropriation.

12 The respondent avers that the appellant’s negligence caused losses at two levels. Where past losses are concerned, the appellant’s negligence, it is alleged, caused the respondent to lose the chance of recovering the misappropriated sums from Ang before the sums were dissipated. Additionally, the respondent alleges that the subsequent misappropriations could have been averted had the appellant discharged its duties.

13 In the proceedings below, the appellant strenuously opposed the respondent’s allegations of negligence. In disputing its liability, the appellant made the following points:

(a) It had not breached its duty of care to the respondent.

(b) Even if the appellant had been in breach, such breach did not cause any losses in FYs 2001 and 2002.

(c) The appellant had been prevented from discovering Ang’s misappropriations in FY 2003 by various factors, such as the respondent’s termination of its services before the completion of the audit for FY 2003.

(d) The respondent had been contributorily negligent in failing to put in place internal controls to prevent or detect Ang’s cash misappropriations.

14 Both parties adduced expert evidence in support of their case. The respondent’s expert, Tay Swee Sze (“Tay”), took the view, inter alia, that the appellant had fallen below the standards of reasonably competent auditors and had failed to discover the irregularities, thereby causing the respondent to sustain losses. Tay opined that the appellant’s failure to inquire into the whereabouts of the “uncredited lodgments” as well as its failure to perform a cash count and roll-back amounted to a breach of duty. Tay also suggested that the appellant had been negligent in its failure to inquire into the circumstances surrounding the long list of reconciling items and the reasons why cash sales had not been regularly banked into the respondent’s bank account in accordance with the respondent’s banking policy. Unsurprisingly, the appellant’s expert, Seow Teng Peng (“Seow”), took a diametrically opposed view and sought to downplay the appellant’s role as an auditor. To this end, Seow averred that the respondent’s directors were expected to have included the review of monthly bank reconciliations as part of their responsibilities and should be equipped with the knowledge and expertise to detect any irregularities therein.

The High Court’s decision

15 The trial judge first set out and examined the applicable principles in relation to the nature and scope of an auditor’s duty, before coming to the view that the appellant had been negligent in the discharge of its duties. She noted (GD at [11]) that where the conduct of an auditor was called into question, the court had to ultimately decide on the legal duty of auditors and what an auditor was required to do in order to discharge his duty of reasonable skill and care. While different auditors could have responded divergently, the trial judge held that the court ultimately had to decide whether an actual breach of duty had been made out on the facts. The duty imposed on the auditor could not exceed the task undertaken, and the actual nature of damage suffered was relevant to the existence and extent of any duty to avoid or prevent it (see GD at [12]–[13]). Taken as a whole, this meant that where breach of a duty of care was alleged, the party making the allegation had to satisfy a two-fold requirement of showing that a duty was owed to him and that it was a duty in respect of the kind of loss which he had sustained.

16 The trial judge went on to observe that whilst an auditor was not expected to be a detective, the duty to audit carried with it an incidental duty to warn the appropriate level of management or the company’s directors of fraud or irregularities discovered during the course of the audit. A breach of the duty would have occurred if, in the course of the audit, the auditor uncovered matters which reasonably required him to take further steps that would have uncovered or led to him uncovering the fraud and he omitted to take such further steps (see GD at [27]). The onus was on the plaintiff to show that the defendant’s act or omission had caused it loss (see GD at [17]).

17 In relation to the first issue of whether the appellant had been negligent in relation to the audits for FYs 2001 and 2002, the trial judge found in favour of the appellant. Ang’s misappropriations had been made good by her practice of teeming and lading in FYs 2001 and 2002, such that the respondent could not be said to have suffered any loss from the cash misappropriations during this period. In her view, the respondent’s inability to show damage (or loss) proved fatal to its claim (see GD at [18]). One further obstacle stood in the way of the respondent’s claim – the respondent had not adduced evidence showing a real possibility that it would have recovered the cash misappropriated by Ang in any event (see GD at [21]). She thus dismissed the respondent’s claim for losses in FYs 2001 and 2002.

18 However, the trial judge went on to hold the appellant liable for a breach of duty which, in her view, had occurred at the latest by 10 March 2004. She opined that on 9 March 2004, when Phong had seen the bank reconciliation statement (“BRS”) for December 2003 (“the December 2003 BRS”) indicating substantial unlodged cash deposits of $672,253.94, he should have been put on inquiry (see GD at [28]–[29]). Phong had reacted inadequately by merely waiting for the bank statement and requesting that the respondent’s employees provide information relating to the subsequent clearance dates. Instead, Phong ought to have investigated the irregularity immediately (see GD at [29]), and this would in turn have divulged a “pattern of continuing and unabated increase in the amount of ‘unlodged cash deposits’” that would have led him to conclude that “something serious was amiss” (see GD at [36]). In failing to review the monthly BRSs throughout 2003, Phong had failed to discharge his duty of care, thereby preventing the respondent from confronting Ang earlier and avoiding the financial detriment which it suffered in 2004.

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