George

Both cases had resulted in the growing number of third parties which have a legal right to sue auditor for negligence. In other word, auditor's liability to third parties has Increased. The defendants had all relied on the accounts In taking and calculating the price of shares in the knitwear company. In the case of Thomas Ltd. , Ð ²?56,100; in the case of Goode, E,500; and, in the case of Gordon, El ,500. Thomas Limited purchased 16,000 ordinary shares in Kinkier in November 1973 which shares were formerly held by a Mr. Saurian, a director of Kinkier. That purchase was at E;10 per share.In addition Thomas purchased a fresh Issue of Kinkier shares, namely 15,000 at El ;50 per share. It Is pleaded for all three pursuers that in making these purchases they relied upon balance sheets and accounts prepared and audited by the defenders. Thomas, they also plead that they relied upon advice given by Mr. Mainframe at meetings held prior to the conclusion of the agreement to purchase the 31, 000 shares. It is said that the audited accounts prepared by the defenders for years prior to 1975 had been highly misleading and inaccurate. Mr. Mainframe, acted negligently and Incompetently In the preparation and auditing of Skinner's accounts.Instead of trading profitably the said Kinkier Knitwear Limited had in fact been trading at a loss both before and after the purchase of the said shares, figures which were of particular significance to Thomas were those of the trading profits and losses. This failure was, in my view, because of slack and careless auditing methods. The pursuers averred-?†The defenders completely failed to make any check on the said Kinkier Knitwear Limiter's system of tock control or the basis of valuation of the stock. As a result the stock figures provided In said accounts were seriously Inaccurate. â€Å"For some years the defenders had failed to carry out normal checks of credit and debit balances. The defenders had completely failed to make prov ision in said accounts for a doubtful debt reserve which they ought to have done. They failed to carry out the normal checks to establish that debts stated by the Company to be due were in fact due as any competent auditors would have done before certifying the said accounts. Competent auditors making the appropriate checks In carrying out an audit of the said Kinkier Knitwear Limited and preparing said accounts would have discovered these inaccuracies and noted them in said accounts.The figure could well have been much higher because a number of old debts found to be still on the books when the check was made in 1976 or 1977 did not carry the date when they were incurred. The figure of E,662 Is, therefore, a minimum. I have the Impression from the fact that Mr. Mainframe made no attempt to circularities any debtors for the 1973 audit or even to go ay be due more to good luck than to good Judgment on his part. I am therefore satisfied that the accounts to 31st March 1973 were neglig ently prepared by the defenders and negligently audited by Mr. Mainframe.When weighed against what was said by the pursuers' witnesses, and accepted by me, to be the methods of an auditor exercising reasonable care and skill his methods were sadly wanting. =>Len the end of the day these Justifications came down to this that the shareholders, to whom his firm owed certain duties as auditors, were all directors and in particular to the inconsideration that he was a close personal friend of Mr. Lennox whom he had known since childhood and not only trusted him but also trusted other staff of the company.I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies on such skill, a duty of care will arise. =>=>He knew that auditors' certificates, when they were â€Å"clean† certificates, were commonly relied on by s hareholders, potential investors, and potential lenders.In the whole circumstances I consider that Mr. Mainframe should have foreseen before he certified the 1973 accounts that these accounts might be relied on by a potential investor for the purpose of deciding whether or not to invest. To these, the latest audited accounts of the company would be of very great importance in influencing them whether or not to invest and at what price. L, therefore, consider that in respect of Thomas and Mr. Gordon, both being in the class of persons who were potential investors, Mr. Mainframe owed a prima facie duty of care in the auditing of the 1973 accounts.