On 26 September 2018 the Amsterdam District Court rendered its judgment in the proceedings between the liquidator of Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (which are all established in the British Virgin Islands) against Dutch public limited companies PricewaterhouseCoopers Accountants NV and PricewaterhouseCoopers NV and four accountants affiliated therewith (collectively, PwC).(1)

The proceedings centred on the fraud committed by Bernard Madoff that came to light in 2009, of which the so-called 'Fairfield Funds' had been victims. In the case at hand, the funds accused PwC of having failed in its duty to audit their financial statements for the 1998 to 2005 financial years (inclusive).


The Fairfield Funds are investment funds. Fairfield Sigma and Fairfield Lambda raised funds from third parties and transferred them as feeder funds to Fairfield Sentry.

Fairfield Greenwich (Bermuda) became Fairfield Sentry's investment manager in 2003. Bernard L Madoff Investment Securities LLC (Madoff LLC), established in New York, was for many years Fairfield Sentry's principal broker/dealer. On the basis of a mandate from Fairfield Greenwich (Bermuda), Madoff LLC acted as Fairfield Sentry's sub-investment manager. It was also appointed as Fairfield Sentry's sub-custodian(2) and, in this capacity, held the vast majority of Fairfield Sentry's assets (securities) in custody.

Madoff LLC was supervised by the US Securities and Exchange Commission (SEC).

As the external auditor of the Fairfield Funds, PwC issued unqualified opinions on their financial statements for the 1998 to 2005 financial years (inclusive).(3)

In December 2008 a large-scale fraud in the form of a Ponzi scheme came to light at Madoff LLC, which had gone unnoticed for more than 20 years. Bernard Madoff himself brought the fraud to light. Shortly after, Madoff LLC was declared bankrupt. In 2009 Madoff was sentenced to 150 years' imprisonment.

The British Virgin Islands' Eastern Caribbean Supreme Court opened the winding up of each of the Fairfield Funds in 2009.

In a 6 January 2012 decision, the Dutch Accountancy Division declared a complaint lodged against one of the PwC accountants, who had been sued in these proceedings, to be unfounded.(4) The complaint concerned the unqualified audit opinions on Fairfield Sentry's financial statements for the 2003 to 2005 financial years (inclusive).

It is now well known that the Fairfield Funds' financial statements for the 1998 to 2005 financial years (inclusive) do not provide a true and fair view of their financial position in these years. The financial statements contain material inaccuracies regarding the existence, ownership and value of the assets. The assets mentioned therein – US Treasury bills, a mix of shares in the some of the largest US companies (eg, Coca-Cola and General Motors) and options that gave entitlement to US Treasury bills – did not exist or existed to a much lesser extent. Further, it has since been established that the unqualified opinions issued by PwC were incorrect in this regard.

The liquidator did not blame PwC for the inconsistency of its unqualified audit opinions with its findings from the audits of the various financial statements. Rather, he accused PwC of improperly organising and conducting the audits (and therefore missing relevant information). In particular, he blamed PwC for issuing unqualified opinions while having insufficient insight into Madoff LLC's administrative organisation and internal control. According to the liquidator, if PwC had properly organised and conducted the audit investigations, it should have concluded that it could not issue unqualified opinions until it had gained such insight.

PwC denied that any technical failure was involved, claiming that it had not been obliged to carry out any additional audit work. According to PwC, such further work would not have resulted in it discovering the fraud at Madoff LLC, as PwC did not function as Madoff LLC's auditor.


The Amsterdam District Court refused to find that PwC:

  • had failed to exercise the care of a good contractor; or
  • should not have issued an unqualified audit opinion on the basis of its audit.

As such, the district court dismissed the funds' claims, holding as follows.

Standard for assessing auditor liability Under Dutch law, the standard for assessing an auditor's liability is "the care that may be expected of a reasonably competent auditor, acting reasonably". Whether this applies depends on the circumstances of the case. To a large extent, this standard is based on what is considered customary and appropriate in the profession. The broadly applicable audit guidelines (the RACs), which applied at the time of the auditing work in question, as well as the interpretation thereof by the (statutorily established) Accountancy Division, are the result of this.

Accountants' professional rules Accountants must be professionally critical in accordance with their professional rules. However, none of the roles which an accountant may assume (eg, adviser, accountant charged with compiling records or auditor) will render them primarily responsible for discovering fraud on the basis of these rules. Even in the most far-reaching role (ie, auditor – in which an accountant opines on the truthfulness of the annual accounts by means of an audit opinion), the professional rules and established disciplinary case law mean that the primary responsibility for preventing and detecting fraud lies not with the auditor, but with the management of the company itself. This was the case in the present situation regarding the fraud at Madoff LLC, in which Fairfield Sentry, a large professional investment fund, had invested.

The fact that it subsequently transpired that fraud had occurred at the audit client's business did not mean that the auditor had violated the applicable rules governing professional ethics and conduct. After all, the primary responsibility for preventing and detecting fraud rests with the company itself. The court referred to RAC 240, which sets out in more detail an auditor's responsibility regarding fraud in the context of an audit of financial statements. The tasks and powers of an auditor like PwC are limited in the sense that it is the company (in this case, the Fairfield Funds) that keeps the accounts (or has them kept by a third party) and draws up the financial statements (or has them drawn up by a third party). The auditor will subsequently check whether all of this has been done properly.

Extent of audit The accountants of major accountancy firms, such as BDO, Ernst & Young, KPMG and Kass & Company (which specialises in audits of investment funds), also carried out audits of funds that, like Fairfield Sentry, had invested in Madoff LLC. These audits were no more extensive than that carried out by PwC. As with PwC, many of these other accountancy firms in various countries (particularly the United States) are involved in procedures that have raised the question of whether their audit of the financial statements of funds investing in Madoff LLC was adequate. None of these firms have been held liable, with the exception of PwC Canada in a 20 March 2017 Discipline Committee of the Chartered Professional Accountants of Ontario decision in the case between the Professional Conduct Committee and the auditor affiliated with PwC Canada, who had issued unqualified audit opinions on Fairfield Sentry's financial statements for the 2006 and 2007 financial years.

Accountancy Division decision In its 6 January 2012 decision, the Accountancy Division stated that the auditing activities performed by PwC at Fairfield Sentry were adequate and had complied with the RACs (in particular RAC 500). The Amsterdam District Court attached great importance to the Accountancy Division's opinion – after all, the division must be considered pre-eminently capable of assessing whether an auditor has performed their activities properly (ie, in accordance with the applicable rules). While the disciplinary test (ie, whether rules of professional conduct and practice have been violated) may differ from the civil test (ie, whether a reasonably competent professional acted reasonably), these rules of professional conduct and practice give substance to the civil test.

Hindsight bias In cases such as this, there is a risk of hindsight bias. First described by psychologist B Fischhoff in 1975, 'hindsight bias' refers to the phenomenon of people who know the outcome of an unexpected event being more inclined to think that they could have (better) foreseen the outcome. Notably, nobody discovered the fraud committed by Madoff, including the SEC, which carried out regular investigations, and the banks, asset managers and other (large) accountancy firms that were somehow involved with the company or its clients. Further, this fraud was based on a conspiracy, involving a large number of officers from Madoff LLC and its accountant, in which documents were knowingly and wilfully forged on a large scale in order to disguise the fact that no investment activities had been performed.

Deposit statements PwC could base its audit of the existence of the investments on the deposit statements received from Madoff LLC and the other (mainly data-focused) auditing work conducted.

Red flags The liquidator stated that the following red flags had been present at Madoff LLC, which had required PwC's extra attention:

  • Madoff LLC had performed multiple roles (ie, it had combined all of the functions essential to securities trading).
  • Remarkably, Madoff LLC – which had been led by one of the advocates of the automation and digitisation of the securities sector – had provided only paper trade tickets and deposit statements.
  • Madoff LLC's accountancy work had been performed by a very small firm.
  • The complex 'split strike conversion' investment strategy used by Madoff LLC had resulted in unlikely consistent and stable growth.
  • Almost all of the funds raised by the Fairfield Funds had been entrusted to Madoff LLC, which had been allowed to invest these funds in the name and for the account and risk of Fairfield Sentry. Madoff LLC had also been allowed to execute the investment decisions that it had taken. Lastly, Madoff LLC had managed and kept the investments acquired in the name and for the account and risk of Fairfield Sentry. It had thus actually operated Fairfield Sentry's business.
  • Many of the key positions within Madoff LLC had been held by Bernard Madoff and members of his family.
  • Madoff LLC had been the final source of all information on the basis of which PwC had performed its auditing work.

According to the Amsterdam District Court, these red flags could not support the contention that PwC:

  • should have done more than it had done; or
  • in the absence of further control work or possibilities, should not have issued an unqualified opinion.

The court based these findings on the following facts:

  • Although the Fairfield Funds' managers had or could have known of these red flags, this was no reason for them to have suspected fraud. The primary responsibility for preventing and detecting fraud rests with the company itself. The Fairfield Funds' managers were professional investment fund managers who had had the expertise to assess investments. They had carried out due diligence on parties in which they had invested, including Madoff LLC. These investigations had apparently not led them to suspect that something was amiss. If the directors of the Fairfield Funds had not noticed anything, then it is hard to argue that PwC should have.
  • On publication of two negative articles about Bernard Madoff and his investment strategy, one of the founders of the Fairfield Funds had dismissed them as "irresponsible journalism". The other red flags did not appear to prompt the directors of the Fairfield Funds to investigate any further or decide that it was unwise to invest in Madoff LLC on a large scale.
  • The liquidator argued that PwC should not have relied on Madoff LLC's deposit statements because it had acted in different capacities (ie, as broker/dealer, sub-investment manager and sub-custodian). However, the exercise of these functions within one organisation was permitted and even customary at the time (and still is today). The liquidator did not contradict this, at least not with sufficient reasons.
  • Madoff LLC had been supervised by the SEC and Citco companies had been supervised by the Dutch Central Bank (DNB). PWC had become aware of this by requesting the SEC Form X-17A-5 Part III for Madoff LLC. However, the SEC never reported any significant supervisory concerns. An auditor may, in principle, assume that the SEC's supervision functions adequately.
  • Other accountants who had audited the financial statements of funds investing in Madoff LLC had also refrained from carrying out any other audit work to verify the existence of the investments. None of the (other) accountants had discovered that Madoff LLC's investments had, to a large extent, consisted of 'hot air'. It can be inferred from this that it had apparently not been customary in the professional group at the time to perform additional work in such cases.
  • PWC had not had to check whether the securities which Madoff LLC claimed to hold for Fairfield Sentry were actually held by Madoff LLC with the Depository Trust Corporation (DTC) and the Bank of New York (BNY). The professional rules had not required this. Moreover, it was not apparent that it had been customary to do so. None of the other accountants who had audited the financial statements of funds investing in Madoff LLC had done so. The obligation to conduct such a further investigation at the DTC and the BNY presupposes a distrust of all information (which was subsequently revealed to have been made up) of Madoff LLC and therefore also of Bernard Madoff himself. Such mistrust had not been obvious given both Bernard Madoff's reputation and the SEC's oversight of Madoff LCC. It had therefore been unnecessary in those circumstances to require PwC to carry out such further checks on the basis of a professionally critical attitude.
  • Lastly, it cannot be understood how PwC, as auditor of a party that had not held any accounts with the DTC and the BNY, could have accessed this information.


The Amsterdam District Court's judgment clarifies the limits of auditors' liability and responsibility. The primary responsibility for a sound internal risk management system and the prevention and detection of fraud lies with the company itself and not its auditor. Because of the inherent limitations of an audit, there is an unavoidable risk that not all material misstatements will be discovered, even if the audit has been adequately organised and performed in accordance with the applicable rules. Fraud is generally more difficult to detect than a material misstatement due to an error, as it is usually accompanied by complicated and carefully designed plans designed to conceal it. If an auditor does not discover fraud, this does not necessarily mean that the auditor has violated the rules of professional conduct and practice.

For further information on this topic please contact Elmira Baghery at AKD by telephone (+31 88 253 50 00) or email ( The AKD website can be accessed at


(1) Amsterdam District Court, 26 September 2018, ECLI: NL:RBAMS:2018:6897.

(2) Dutch private limited companies Citco Fund Services (Europe) BV, Citco Bank Nederland NV Dublin Branch and Citco Global Custody NV were Fairfield Sentry's administrator, registrar and transfer agent and payment bank and custodian, respectively. They were supervised by the DNB.

(3) With effect from the 2006 financial year, the Fairfield Funds commissioned PricewaterhouseCoopers LLP (PWC Canada) to audit their financial statements.

(4) The complaint was lodged by parties other than the liquidator.

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