In a recent 4-3 decision, the Supreme Court of Canada held that Deloitte & Touche breached the duty of care it owed to its client, Livent Inc., when it failed to uncover Livent management’s fraud in the course of conducting a statutory audit. Further, the majority in Deloitte & Touche v. Livent defined the auditor’s scope of liability by finding that the shareholders and innocent directors would have ensured that Livent filed for bankruptcy sooner – thereby limiting its losses – if Deloitte had not been negligent in the audit. In an article in Law Times, Dale Smith reaches out to Allan Coleman, Osler partner and Co-Chair of the firm’s Corporate and Securities Litigation Group, for his reaction to the decision. Allan explains that the decision clarifies the level of potential liability for auditors when their negligence causes their client to incur losses, but pointed out the tension between the majority and minority decisions about where the risk of loss should fall: with the auditors or with the fraudulent actors in management?
“How will those risks be allocated in practice?” Allan asks. “Does that mean that auditors will require higher levels of insurance, which will then have a greater cost to the audit firms, which will then be passed on to the client in the form of greater fees?”
He says that while the minority was wary of spreading the risks of the actions of the fraudulent actors to everyone, the majority was not oblivious to the commercial realities.
“The dissent and the majority had a different view as to the appropriateness of the commercial reality of the fact that if you increase the risk of auditor liability that it will have the corresponding allocation of that risk around all audit clients,” he continues.