Thoroughbred Breeders Association of South Africa v Price Waterhouse

• Jurisdiction: South Africa

Thoroughbred Breeders Association of South Africa v Price Waterhouse
1999 (4) SA 968 (W)

1999 (4) SA p968

Citation	1999 (4) SA 968 (W)
Case No	95/26187
Court	Witwatersrand Local Division
Judge	Goldstein J
Heard	May 21, 1997; May 22, 1997; May 23, 1997; May 27, 1997; May 29, 1997; May 30, 1997; October 27, 1997; October 28, 1997; October 30, 1997; October 31, 1997; November 1, 1998; November 4, 1998; November 5, 1998; November 6, 1998; November 7, 1998; April 22, 1998; April 23, 1998; April 24, 1998; April 28, 1998; April 29, 1998; April 30, 1998; May 4, 1998; May 5, 1998; May 6, 1998; May 7, 1998; July 27, 1998; July 28, 1998; July 29, 1998; July 30, 1998; July 31, 1998; October 26, 1998; October 27, 1998; October 28, 1998; October 29, 1998; October 30, 1998; November 2, 1998; November 3, 1998; November 4, 1998; November 5, 1998; November 6, 1998; July 7, 1999; July 17, 1999
Judgment	July 22, 1999
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.

Flynote : Sleutelwoorde B

Accountant — Auditor — Auditing contract — Nature of — Duties of C auditor — Client responsible for correctness of assertions in financial statements — Auditor to obtain reasonable assurance that financial statements correct — Not guaranteeing material correctness of statements nor required to examine every assertion therein — If particular assertion examined on test basis, auditor to do so with reasonable care, displaying skill and care of reasonably competent and cautious D auditor — Auditor doing yearly audit failing to detect long-outstanding cash deposits and that promissory note belonging to client encashed — Unusual items in bank reconciliations not picked up and promissory note never examined — Auditor's conduct in regard to long-outstanding deposits amounting to breach of contract — Relative value of promissory note rendering it immaterial — However, fact that auditor noticed maturity date which had long elapsed yet did not investigate any further also amounting to breach of contract. E

Damages — Apportionment of — Apportionment of damages in terms of s 1 of Apportionment of Damages Act 34 of 1956 — No reason why Act should not apply also to contractual claims.

Damages — Measure of — Damages for breach of actuarial contract where F negligence of actuaries resulted in capital loss to client — Interest on — Whether rate should be normal mora rate or (higher) rate charged by client's bank on overdraft accounts — Client's bank account in overdraft and both parties aware of this — Audit agreement entered into on basis of such common knowledge — Auditors having tacitly assumed liability for loss of interest involved in increase of overdraft. G

Practice — Pleadings — Particulars — Further particulars for purpose of pleading — Abolition of request for in High Court — Alternative procedure (in terms of Rules 18(12) and 30(2) of Uniform Rules) cumbersome and seldom employed — In result, lax pleading encouraged and burden on Court increased — Matter referred to Rules Board for reconsideration.

Headnote : Kopnota

The plaintiff, a body not for gain that obtained its income mainly H from commissions earned at horse auctions, had employed the defendant firm as its auditors since 1990. During January 1994 the defendant had audited the plaintiff's financial statements in respect of the year ended 31 October 1993. The plaintiff alleged that the defendant I had in doing so breached the auditing agreement between them by failing to detect (1) that several substantial sums of cash (in all totalling R143 403,44) had not been deposited for long periods; and (2) that a promissory note with a face value of R138 864 belonging to the plaintiff had been encashed and the proceeds stolen. According to the plaintiff the undeposited cash was stolen by its financial manager, one M, who had subsequently encashed the promissory J

1999 (4) SA p969

note to cover the thefts. The defendant denied the theft but admitted A the allegations regarding the promissory note. It was common cause that M had after the audit gone on to steal R1 389 801,90 from the plaintiff before his activities were uncovered. The plaintiff alleged that this theft could have been averted had the defendant properly carried out the audit and discovered M's earlier activities. The plaintiff accordingly claimed damages in the total amount stolen plus interest. The defendant denied B any breach of the audit agreement and raised various defences based on the contention that the plaintiff had itself to blame for its loss because it had continued to employ M in a senior financial position despite having been aware of the fact that M had a criminal record for theft. The defendant also instituted a contested counterclaim for fees.

It appeared that, despite having examined the plaintiff's bank C reconciliations for outstanding deposits, the audit clerk in question had failed to notice certain long-outstanding cash deposits or, if he had noticed them, failed to recognise their significance. (The sums involved ranged between R1 140 and R52 700 and had remained outstanding between two and six months.) The payee of the promissory note (maturity date 8 February 1993) had discounted it with a D bank, which had in turn discounted it with the plaintiff, having paid R108 500 for it. It was entered as an asset in the plaintiff's books (in particular, it was invested in plaintiff's so-called 'Futurity Programme', which had its own bank account and books), but the proceeds, though paid into the plaintiff's sales account, had been misapplied by being credited to the plaintiff's debtors' accounts. E The result was that on 31 October 1993 (the end of the plaintiff's financial year) the note was no longer in the possession of the plaintiff and had thus ceased to be an asset of the Futurity Programme, despite still being reflected as such in the Programme's books. It was common cause that the audit clerk had not verified the note even though it had still been listed as an asset after maturity.

It was furthermore common cause that the audit had to be conducted 'in F accordance with generally accepted auditing standards' and that the defendant's duty had been to 'perform the audit with the due professional care required of an auditor in public practice, and . . . not . . . negligently'. The parties' expert witnesses, however, differed on the issues of the purpose of the auditing process and the standard required of auditors in South Africa. The plaintiff's G expert contended that the purpose of an audit was to detect fraud and error, while the defendant's expert contended that it was merely to seek corroboration of the assertions in the financial statements, to seek persuasive rather than conclusive evidence of such assertions and not to detect material misstatements (ie fraud and error).

Held, that these differences were more apparent than real: H in seeking corroboration of the assertions in the financial statements the auditor was perforce testing for material misstatements and the existence of fraud and error and in searching for the latter he was perforce looking for corroboration. On either approach the auditor had to question apparent anomalies in the material tested. In the instant case the long-outstanding deposits and the apparently overdue promissory note were clearly anomalies which the clerk in question had failed to appreciate. (At 992H - I and 993C - D.) I

Held, further, as to what the auditing contract had required of the parties, that it was not necessary to formulate the terms thereof comprehensively. From the evidence led and the cases referred to during argument it appeared (1) that it was the plaintiff and not the defendant who had been responsible for the correctness of the assertions in the financial statements; (2) that the defendant's duty had been to obtain reasonable assurance that the financial J

1999 (4) SA p970

statements fairly presented in all material aspects the financial A position and the results of the operations of the plaintiff for the year in question but that the defendant did not guarantee the material correctness of the statements, so that if they proved to be materially incorrect it would not necessarily follow that the defendant had breached the contract; (3) that in order to obtain the above-mentioned reasonable assurance the defendant had not been required to examine every assertion in the B financial statement but had been entitled to examine them on a test basis; (4) that, if an auditor such as the defendant did decide to examine any given assertion, it had to do so with reasonable care, displaying the skill, care and caution which a reasonably competent, careful and cautious auditor would use; and (5) that such an auditor, though it had to be alive to the possibility of misstatements, was only bound to exercise a reasonable amount of skill and care, which C requirement depended on the circumstances of each case. (At 995B - G/H.)

Held, further, as to whether the defendant had committed a breach of contract in regard to the long-outstanding deposits, that a re-performance of the year-end reconciliation of 31 October 1993 would have revealed the differences between the amounts received in the cashbook operated in respect of the sales bank account and those D reflected in the bank statement to which it related and that this revelation would have led to the discovery of the outstanding deposits. There had thus been a need for a re-performance of the year-end reconciliation. It followed that the defendant's audit clerk ought to have examined the reconciliations in question with an eye to long-outstanding deposits and unusual items. (At 996F - 997H. )

Held, further, that the superficial examination conducted E in casu did not amount...