Thoroughbred Breeders Association of South Africa v Price Waterhouse

• Jurisdiction: South Africa
• Judge: Goldstein J
• Judgment Date: 22 July 1999
• Citation: 1999 (4) SA 968 (W)
• Docket Number: 95/26187
• Counsel: S F du Toit SC (with him E Menell) for the plaintiff. J M Suttner SC (with him D G Leibowitz) for the defendant.
• Court: Witwatersrand Local Division

Goldstein J:

The plaintiff in this trial I is the Thoroughbred Breeders' Association of South Africa (the TBA), a body not for gain incorporated under s 18 of the Livestock Improvement Act 25 of 1977. It has some 800 members. The TBA obtains its income mainly from commissions earned at auctions of horses, conducted in the main at the TBA's headquarters at Gosforth Park, Germiston, but also at other venues. J

Goldstein J

The defendant is Price Waterhouse, a large firm of auditors which has A offices in all the main centres in South Africa. Price Waterhouse became the auditors of the TBA after its previous auditors, Richardson Reid, amalgamated with Price Waterhouse in about 1990. Richardson Reid had been the auditors of the TBA since the 70s.

Mr M E J Reid was the partner in charge of the TBA's audit, both at B Richardson Reid and at Price Waterhouse. Reid knew or must have known the TBA's business well.

At all material times the TBA's financial year ended on 31 October. During January 1994 Price Waterhouse performed its audit of C the TBA's financial statements in respect of the year ended 31 October 1993. The TBA alleges that when Price Waterhouse did so it breached the contract of audit in force between the parties (the auditing contract) by failing to detect, firstly, that substantial amounts of cash had not been deposited for long periods during the year and, secondly, that a promissory note belonging to the TBA with a face D value of R138 864 had been encashed. The TBA says that the undeposited cash was stolen by its then financial manager, Mr J W Mitchell, and that Mitchell encashed the promissory note and used its proceeds to cover other thefts. Price Waterhouse denies that Mitchell stole the undeposited cash. However, it admits the TBA's allegations in regard to the promissory note. It is common cause that after the audit of the TBA's financial statements in respect of the year ended 31 October 1993 Mitchell stole R1 389 801,90 from the TBA before his activities were discovered. E

The TBA contends that if Price Waterhouse had carried out the audit for the October 1993 financial year properly, Mitchell's activities would have been uncovered. He would then have been dismissed and his thefts which occurred in the period between February and November 1994 would not have taken place. The TBA claims the amount stolen and F interest thereon as damages.

Price Waterhouse raises various defences. Amongst these is a denial that it breached the agreement. A number of defences arise too from the fact that the TBA knew at all material times that Mitchell had a criminal record, having been convicted of three counts of theft in 1985 involving amounts totalling R50 103,07 and having been sentenced to G imprisonment for such. Price Waterhouse also has a contested counterclaim for fees.

Initially Price Waterhouse disputed the quantum of Mitchell's thefts during 1994 and much time was spent before me on this issue. The TBA contends, and Price Waterhouse disputes, that a H punitive costs order ought to be made against Price Waterhouse for not agreeing to quantum earlier.

The matter is extremely complex both factually and in law. Fortunately though, it seems that, despite a welter of evidence, many of the facts are not in dispute at the end of the day. What is often contested, and usually hotly so, are the inferences to be drawn from I them. Unless the contrary appears I regard the facts set forth below as common cause or not seriously contested. The headings I have used reflect an attempt to render the mass of relevant material more easily comprehensible. Often, however, there is perforce a measure of overlapping between the issues so J

Goldstein J

delineated and at times, in the interest of facilitating understanding A of the flow of the argument, I have permitted myself a measure of repetition.

The undeposited cash

The TBA operated a number of bank accounts, the chief of which was B known as 'TBA Sales'. I shall refer to it as 'the sales bank account'.

As is customary, the TBA operated a cashbook in respect of the sales bank account. The purpose of a cashbook is to reflect the position in the bank account to which it relates. Like a bank statement a cashbook has, broadly speaking, two kinds of entries - one reflects payments and C one receipts. Theoretically the difference between the payments and receipts in a cashbook should be equal to the balance reflected in the bank statement concerned. However, this rarely occurs, primarily because there is always a delay between the dates of receipts and payments recorded in the cashbook and the dates when such receipts and payments actually find their way into the relevant bank account D statement. In respect of receipts, such delays typically occur when money is received on a particular day, reflected in the cashbook as having been so received but only deposited on the following day. In respect of payments made, delays usually occur when cheques written out and reflected in the cashbook on a particular day are only presented by the payee at a later date. In order to account for the almost E inevitable differences between the balances in the cashbook and those in the bank statements on a particular date what are known as 'bank reconciliations' are made reflecting such differences. In the TBA's case bank reconciliations occurred on the 25th of the month except in respect of the last month of the financial year, October, where the reconciliation occurred on the 31st. F

The monthly bank reconciliations in respect of the sales bank account were done by Ms Gloria Seaman. She was not called as a witness. She worked under Mitchell, the financial manager, who in terms of the then policy of the TBA was supposed to sign all the bank reconciliations as evidence of his having reviewed them. In fact he failed to sign any of them. The reconciliations so prepared in respect of the months April to G October inclusive read as follows:

'TBA Sales account
Bank reconciliation as at 25.04.93 H
Balance per Cash book		7 088 051,78
— Receipts	9 160 809,44	I
— Payments	(2 072 757,66)
O/standing transfer (series)		(40 039,59)
O/standing transfer (research)		548 987,17
O/standing deposit rec 50051		(23 700,00)
O/standing deposit rec 50055		(52 700,00)
O/standing deposit rec 50063		(25 300,00)
O/standing cheques		113 944,84
Balance per Bank statements J		7 609 244,20

Goldstein J

— Curr acc	7 023 417,08	A
— Call acc	585 827,12
TBA Sales account
Bank reconciliation as at 25.05.93		B
Balance per cash book		(4 317 236,08)
— Bal B/F	7 088 051,78
— Receipts	5 865 854,73
— Payments	(17 271 142,59)
O/standing deposit rec 50051	(23 700,00)	C
O/standing deposit rec 50055 C/B 117		(52 700,00)
O/Standing cheques		86 987,82
Balance per Bank statements		(4 306 648,26)
— Curr acc	(4,897 507,08)
— Call acc	590 858,82
TBA Sales account		D
Bank reconciliation as at 25.06.93
Balance per cash book		(3 732 060,68)
— Bal B/F	(4 317 236,08)	E
— Receipts	2 389 255,68
— Payments	(1 804 080,18)
O/standing deposit rec 50051		(23 000,00)
O/standing deposit rec 50490		(3 300,00)
O/standing cheques		169 287,40
Balance per Bank statements	F	(3 599 073,18)
— Curr acc	(4 195 225,45)
— Call acc	596 152,27
TBA Sales account		G
Bank reconciliation as at 25.07.93
Balance per cash book		(2 580 740,27)
— Bal B/F	(3 732 060,58)
— Receipts	2 296 739,35
— Payments	(1 145 419,04)	H
O/standing deposit rec 50051		(23 000,00)
O/standing deposit rec 50490		(3 300,00)
O/standing deposit rec 50601		(25 000,00)
O/standing deposit rec 50602		(1 140,00)
O/standing cheques		533 176,81
Balance per Bank statements		(2 100 003,46)
— Curr acc	(2 701 300,61)	I
— Call acc	601 297,15

Goldstein J

TBA Sales account		A
Bank reconciliation as at 25.08.93
Balance per cash book	(3 345 759,91)
— Bal B/F	(2 580 740,27)
— Receipts	4 193 318,41	B
— Payments	(4 958 338,05)
O/standing deposit rec 50051		(23 000,00)
O/standing deposit rec 50490		(3 300,00)
O/standing deposit rec 50601		(25 000,00)
O/standing deposit rec 50602	C	(1 140,00)
O/standing deposit rec 50783		(6 840,00)
O/standing deposit rec 50788		(1 140,00)
O/standing deposit rec 50789		(7 910,00)
O/standing deposit rec 50790		(1 140,00)
O/standing deposit rec 50791		(1 140,00)
O/standing deposit rec 50792		(1 710,00)
O/standing deposit rec 50793		(6 200,00)
O/standing deposit rec 50798	D	(10 760,00)
O/standing cheques		465 898,85

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