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March 5, 2018

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Law Times • march 5, 2018 Page 9 www.lawtimesnews.com Supreme Court sets out liability for auditors DALE SMITH For Law Times T he Supreme Court of Canada has laid out the scope of responsibility for auditors following a 4-3 decision that found that De- loitte & Touche was negligent in performing a statutory audit and failing to uncover fraud com- mitted by Livent Inc.'s manage- ment. Livent was forced into receiv- ership. The court found that a duty of care was owed by the auditor to its client, but it also supported protections for audi- tors against misrepresentation claims by shareholders. In Deloitte & Touche v. Liv- ent Inc. (Receiver of), SCC 2017 63, the court as a whole found that Deloitte breached its duty when it failed to discover and expose Livent's fraud in the au- dited statements that it prepared. However, the dissenting judg- es did not agree that Deloitte should be liable for virtually all of the losses that Livent suffered in the period after. "The duty of auditors is to the corporate client and does not extend, absent special circum- stances, to shareholders," says Allan Coleman, partner at Osler Hoskin & Harcourt LLP in To- ronto, who was not involved in the case. "In that sense, it circum- scribes the scope of the auditor's duty." In this particular case, Cole- man says, the factual circum- stances were clear that the deci- sion was predicated on the ma- jority's finding that, had Deloitte not been negligent in the audit, the shareholders and innocent directors would have exercised their power of supervision in order to ensure that Livent filed for bankruptcy when they found out, rather than continuing to incur subsequent losses. He says the decision clarifies the scope of potential liability that auditors face to the client in circumstanc- es where the auditor is found to be negligent and has caused the client to incur losses. Steve Popoff, partner at Blaney McMurtry LLP in To- ronto, who was not involved in the case, says that a future case with different facts could go in a different direction. "The most interesting thing that I found in the case was the fact that the dissent was saying, we're looking at commercial re- ality. . ." says Popoff, adding that firms undertaking these audits could have significant liabil- ity and the dissenting judges felt they were not prepared to make them an insurer for every claim. Coleman says there was a tension between the majority and the minority decision about where the risk of loss should fall in cases where you have fraudu- lent actors in the senior manage- ment of the company, with the minority seeming to suggest that it should rest with the fraudulent actors, and the majority stating that auditors are compensated handsomely for their work, and as part of that they should be expected to incur greater risk if they are negligent. "How will those risks be al- located in practice?" asks Cole- man. "Does that mean that audi- tors 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?" Coleman said that the con- cern of the minority was spread- ing the risks of the actions of the fraudulent actors around to everyone, but that doesn't nec- essarily mean that the majority was not alive to the commercial realities. "The dissent and the majority had a different view as to the ap- propriateness of the commercial reality of the fact that if you in- crease the risk of auditor liability that it will have the correspond- ing allocation of that risk around all audit clients," says Coleman. Popoff notes that the SCC ruled that Livent's receiver could bring the claim, and that there was a duty of care based upon the retainer, but that Livent couldn't bring a claim against the auditor for the "comfort letter" that was part of the work on Livent's se- curities offering while the com- pany found more financing to extend their operations. "What it means is that share- holders are going to have to rely on actual duties that are set out in the statutes — the common law may not help you," says Popoff. "There's a long-standing doc- trine that shareholders aren't owed a duty of care by the audi- tors in certain circumstances, so they have to claim for economic loss under the Securities Act and the remedies under that." Coleman adds that because the "comfort letter" was not part of the statutory audit and was part of a unique contract that was not part of the losses that were being alleged in this case, it was not intended to provide shareholders with information that would allow them to fulfil their supervisory responsibility. Coleman says there was some ambiguity in the language of the decision that could be interpret- ed to say that there was no duty of care. "I think what they're really saying is there's no duty of care that is related to the type of loss- es that are being alleged here," says Coleman. "I think if you read it all to- gether, what they're saying is that you have to analyze the duty of care that exists with respect to the nature of the work that's be- ing undertaken and the purpose for which it's undertaken." Thomas Slade, partner with Supreme Advocacy LLP in Ot- tawa, says the key takeaway from the decision for all professionals is that they need to be clear with clients about the services they are undertaking to provide. "By carefully defining the scope of responsibility, a profes- sional can limit their liability," he says. Slade notes that at the SCC, accountants' groups were par- ticularly concerned about the possibility of being exposed to indeterminate liability. "The court took the wind out of the sails of this argument finding that it is nothing more than a residual policy consider- ation," says Slade. "This decision will be seen as constraining the f loodgates argument in future negligence cases." Coleman says it will be very interesting when a case arises in the future where there is a situa- tion where the negligence of the auditors didn't cause the com- pany to continue to exist when it might have simply declared bankruptcy as Livent did, but he would rather have sent that company down a path it might not otherwise have taken. "The devil will be in the de- tails in future cases that are less clear-cut on the facts as to how those losses would be proved to have been caused by the audi- tors," says Coleman. Counsel for Deloitte did not provide comment, while coun- sel for Livent's receivers did not respond to a request for com- ment. LT FOCUS Steve Popoff says a recent SCC ruling shows 'shareholders are going to have to rely on actual duties that are set out in the statutes.' ONTARIO LAWYER'S PHONE BOOK 2018 Ontario Lawyer's Phone Book is your best connection to legal services in Ontario with more than 1,400 pages of essential legal references. 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