OE & DR Pope Pty Ltd v Harris & Orchard (No 3)
[2010] SASC 10
•1 February 2010
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
OE & DR POPE PTY LTD v HARRIS & ORCHARD (No 3)
[2010] SASC 10
Reasons of Judge Lunn a Master of the Supreme Court
1 February 2010
PROCEDURE
Pleadings - application to file amended statement of claim - held new cause of action not properly pleaded - defendant not to be held to its previous admission made in the context of a significantly different basis of claim - held impermissible to give particulars of breach by reference to an expert's report - application refused.
OE & DR POPE PTY LTD v HARRIS & ORCHARD (No 3)
[2010] SASC 10Reasons on the plaintiff’s further application to amend the statement of claim.
JUDGE LUNN: In this action the plaintiff sues the defendant as its accountant for professional negligence. The action was commenced in 2001, but the plaintiff has not as yet been able to finalise a statement of claim on which it is prepared to go to trial. The action is governed by the 1987 Rules.
By an application of 1 December 2009 the plaintiff sought leave to file a 3rd further amended statement in the terms of a draft exhibited to the affidavit of its solicitor filed on that day (“the ASOC”). I refuse the application for the following reasons (which are not exhaustive of the defects in it):
1 New Cause of Action not properly pleaded.
It is necessary to see the proposed new 23.15-23.15.6 of the ASOC in the context of the existing 2nd further amended statement of claim filed on 21 December 2007 (“the existing SOC”). That statement of claim pleaded, inter alia:
7 At all times material to this action the defendants:
7.1carried on a business as a firm of certified practicing accountants or chartered accountants practising in partnership and providing accountancy, auditing, financial, commercial, taxation and business advice and services (“professional accounting services”);
…..
8At all times material to this action there was an Agreement or Agreements between Harris & Orchard and the Company that Harris & Orchard would provide professional accounting services to the Company and other entities in the Pope Group (“the Retainer”).
9Pursuant to the Retainer Harris & Orchard:
9.1Prepared the financial statements of the Company the Trust and all of the members of the Pope Group;
…..
9.7Assisted the Company and other entities in the Pope Group with matters relevant to securing finance from the group’s principal lender Australia and New Zealand Banking Group Ltd (“the ANZ Bank”);
9.8 Provided auditing services to the Company …..
9.9Provided general accountancy, financial, commercial and business advice to the Company, the Trust and other members of the Pope Group.
(referred to in this pleading as “the general services”)
…..
14The material times are from 1987 to 1997.
15It was an implied term of the Retainer that Harris & Orchard would perform the professional accounting services pursuant to the Retainer and provide the general services and specific advice with reasonable care and skill and in particular with that degree of skill and diligence to be expected of reasonably competent and prudent professional accountants …..
…..
23Harris and Orchard were in breach of the duty of care term and/or negligent in that they failed to exercise the care and skill to be expected of reasonably competent professional accountants performing the services described at paragraph 7.1 above pursuant to the Retainer.
Particulars of Breach of Contract and/or Negligence
(Thereafter appear particulars in paras 23.1-23.14 of alleged breaches, but none refer expressly to breaches of auditing obligations).
By the ASOC the plaintiff seeks to introduce a new paragraph 23.15 as follows:
23.15As to the audit of the Company during the material times, failing to conduct the audits in respect of the transactions between the Trust and the Company in accordance with the applicable auditing and accounting standards and the standard of care, skill and diligence expected of a reasonably competent and prudent auditor who had knowledge of each of the Dealings as at the following times:
23.15.1 As to all the Dealings other than the back to back loan transaction, prior to the commencement of each audit of the Company since the audit for the financial year ended 30 June 1988 (“the 1988 audit”) through to the financial year ended 30 June 1997;
23.15.2 As to the back to back loan, prior to the commencement of each audit of the Company since the audit for the financial year ended 30 June 1993 (“the 1993 audit”) through to the financial year ended 30 June 1997.
Particulars
23.15.3 As to the 1988 and 1993 audit, the plaintiff relies on the expert report of GS Kirk dated 6 November 2009 (“the Kirk report”) at paragraphs 169, 190, 195, 197, 205, 207, 208, 209, 210, 211, 215, 227, 239, 241, 247, 249, 250, 251, 252, 253;
23.15.4 As to the audit years following the 1988 audit:
(a)failing to ensure that the matters that should have been identified and actioned by a prudent auditor in the matter described at paragraphs 207, 208, 210 and 211 of the Kirk report and the matter described at paragraph 209(c) of that report, were either rectified by the Company or alternatively failing to follow up any explanations provided by the Company regarding the matters that should have been identified and actioned in the 1988 audit;
(b)the plaintiff further refers to paragraph 215 of the Kirk report where Mr G S Kirk states that the irregularities he identified with respect to the 1988 audit, had a compounding adverse effect in respect of all succeeding audits;
23.15.5 As to the audit years following the 1993 audit, in addition to the matters raised in paragraph 23.15.4 of this pleading, failing to ensure that the matters that should have been identified and actioned by a prudent auditor in the manner described at paragraphs 249, 250(a) and 252 of the Kirk report and the matters described at paragraphs 251(c) and (d) of that report, were either rectified by the Company, or alternatively failing to follow up any explanations provided by the Company regarding these matters;
23.15.6 Failing to identify during any of the audits of the Company during the material times, that the Company was, by intermingling its affairs and records with those of the Trust, assisting in a breach of the Trustee’s statutory duties pursuant to section 84B of the Trustee Act 1936 (SA) regarding the maintenance and retention of trust records, and failing to recommend that the Company take action to rectify this.
Subparas 23.1-23.14 were particulars of the breaches of the defendant’s alleged duties as “reasonably competent professional accountants”. Apart from the proposed new paragraph 23.15 no reference was made to any duty allegedly owed by reason of the defendant being an auditor as distinct from being a professional accountant. The proposed paragraph 23.15 seeks to introduce a new cause of action based on breach of duty specifically as an auditor. Subparas 23.15-23.15.2 are not proper particulars of the plea in paragraph 23, but are a new rolled up plea of duty and breach. It is embarrassing to plead the duty of the defendant as an auditor as part of the particulars of the breaches alleged in paragraph 23.
Paragraph 9 of the existing SOC pleads the provision of auditing services as part of the “general services”. The balance of the existing SOC seeks to impose an implied obligation on the defendant in respect of the transactions in question, which need not be detailed for the purpose of these reasons, from the breadth and scope of the general services provided by the defendant to the plaintiff of which auditing was but one of many types of accounting services. The proposed paragraph 23.15 seeks to focus on a duty arising specifically from the defendant being employed as an auditor as distinct from the general services. I accept the submissions of the defendant’s counsel that this requires the plaintiff to plead separately and distinctly the nature of the retainer as auditor and the nature and the relevant duties which that imposed on the defendant at each of the material times. The material supporting the application discloses that the defendant’s appointment as auditor was not apparently an appointment as auditor for the benefit of the members of the plaintiff, but for the benefit of a lender to the plaintiff. The plaintiff needs to plead why such an appointment gives rise to any duty to the company, which it now says was breached.
I deal with the improper pleading of the breaches of the defendant’s alleged duties as auditor below, but insofar that is a plea of a breach of duty by the defendant not to have drawn certain irregularities to the attention of the management of the plaintiff there is no plea that the plaintiff would have done anything different if the defendant as auditor had acted in that way, or, if the plaintiff had ignored the intimation, that the defendant should have taken some further action. Such a plea of causation seems necessary for the plaintiff to have any cause of action based on subpara 23.15.
2 “At all material times”.
The opening words of paragraph 23.15 refer to audit “during the material times” and that is defined in paragraph 14 to mean from 1987 to 1997. That does not seem to tie in with the various dates pleaded in the rest of paragraph 23.15.
3 Whether the defendant should be held to its previous admission about it being an auditor
In paragraph 8 of its amended defence filed on 21 July 2008 the defendant pleaded:
8As to paragraph 8 of the Statement of Claim the defendant:
…..
8.2admits that since approximately 1972 it has provided certain accounting services to the Company including:
…..
8.2.4auditing the Company’s books annually since approximately 1985/87 as required by the ANZ Banking Group Ltd.
The plaintiff argues that as the defendant has already admitted that it has provided auditing services it is not necessary for it now to have to plead in any detail the retainer’s nature and the scope of the auditing services. I do not accept this. On the existing statement of claim the only significance of the plea of the auditing services was as an indicator of the scope of the general services provided by the defendant to the plaintiff. The defendant properly admitted that it had provide some such services, but only in a context of a claim where the precise nature of the auditing services had no bearing on the relief sought. As the plaintiff seeks to introduce an entirely new cause of action based on the defendant’s duty as auditor, the defendant is entitled to have the proper basis of the claim properly pleaded, and is not to be restricted by its previous admission.
4 Plea of breach by incorporation of an expert’s report.
The defendant’s counsel objected to the particulars of breach in the proposed 23.15.3-23.15.5 being specified largely by reference to an expert’s report of Mr Kirk which had been delivered by the plaintiff to the defendant.
The defendant’s counsel cited what I had said in Coonawarra Premium Vineyards Ltd v Nugan Group Pty Ltd on December 2005, Judgment No [2006] SASC 5 at [15], where I said:
Again, the provision of particulars by reference to other documents is objectionable. I ascertained it was not the documents themselves which the defendant was seeking to plead. The plea is an unacceptable shorthand way of seeking to plead the contents of the documents. It is no answer that because of these documents the plaintiff is well aware of the case which the defendant is seeking to make out through the particulars. R 46A requires that the facts relied upon be pleaded, which means them being expressly incorporated into a form of pleading which is in accordance with the rules and filed at Court. The purpose of pleadings under R 46A is also to inform the Court the case of the party who files it. The Court does not have access to these other documents. The report of Robert Paul of 19 March 2003, which is referred to in the particulars, has no special status because it is an expert’s report to which R 38.01 applies. Although R 46A.10(b) refers to a trial Judge being able to refer to experts’ reports in determining whether a party has suffered prejudice or embarrassment from some matters contained in the expert’s report not being pleaded, that is not meant to be a substitute for a proper pleading of the issues under R 46A.05. The particulars 1-4 are to be struck out.
I adhere to what I said there. However, there is not necessarily a total prohibition against particulars being given by reference to other documents. It must be assessed on whether the object and purpose of pleadings are fulfilled by what is pleaded. That did not occur in that case, and it is not the case here. The cases in which it is permissible are likely to be rare and relate to matters of peripheral detail rather than to the substance of the breaches, as is the case here.
To illustrate why that mode of pleading is unacceptable here I quote some of the paragraphs relied upon out of the expert report of Mr Kirk:
169In my opinion a prudent auditor would have prepared an audit plan for the 1988 audit and for both the 1988 and 1993 audits would have documented the steps to be taken in performing the audit to conduct audit procedures in relation to transactions and account balances involving the Trust as contemplated by AUP 26 and (in 1993) so as to ensure the disclosure requirements of AAS 22 were met.
…..
190An issue however that in my opinion would, in the normal audit process, have arisen for consideration, was whether the circumstances were such as to cast doubt as to the recoverability of the much increased amount owing to OE & DR on the running loan account.
…..
195In my opinion, in the context of the foregoing discussion, whilst from my examination of the audit working I have concluded that H & O failed to gather sufficient appropriate audit evidence to draw a soundly based conclusion, one way or the other, concerning the alleged irregularities/improprieties in respect of both the first mortgage transaction and the second rental arrangement, even assuming such irregularities/improprieties on further enquiry were found to exist, most auditors, acting prudently, would have dealt with the matters, at least in the first instance, other than by qualification of the statutory audit report.
…..
197By way of elaboration on the above conclusions, particularly with respect to the first mortgage transaction, whilst my opinion is that the circumstances were such as not to require an auditor, acting prudently, to qualify the audit report on the 1988 accounts, there were aspects of the transaction concerning propriety, fiduciary duty and potential conflict of interest issues that in my opinion required some active response by a prudent auditor.
…..
205That said, the failure to account to the Trust for the rent so collected (or to at least put in place and documented some commercially plausible agreement between the parties that, as part of it, provided for OE & DR retaining as its own income the rent so collected) would in my opinion have caused an auditor, acting prudently, to have raised probity issues with the client and sought to have such issues resolved at an early stage.
…..
How should H&O otherwise than by audit report qualification have dealt with the alleged irregularities?
207Having regard to my discussion of the alleged irregularities relative to the 1988 financial year and the probity issues that in my opinion arose, in my opinion a prudent auditor would have communicated the concerns I have referred to senior management of the client as soon as the auditor became aware of those concerns.
208In my opinion, in such communication (the essence of which in my opinion should have been confirmed in writing) a prudent auditor would have:
(a)In respect of the first mortgage transaction explored a solution to the “ultra vires” issue and to the conflict issues whereby OE & DR benefited by being able to borrow against the security of the Trusts property for its own benefit, and to the detriment of the Trust, $190,000 more than the amount of $160,000 required to repay the Brine Mortgage. In doing so, I would have expected a reasonably competent accountant to have proposed an arrangement whereby the Trust borrowed directly from the ANZ bank against the security of its Kent Town property an amount sufficient to repay the Brine mortgage, ie $160,000 and without some appropriate commercial justification from the viewpoint of the Trust, no more then (sic) that amount.
(b)In respect of the second rental arrangements, in the absence of identifying the existence of, or there being promptly put in place, some commercially plausible agreement whereby, in exchange for appropriate consideration in favour of the Trust, OE & DR was entitled to collect and retain the whole of the Theodore Bruce rent, a prudent auditor would have requested a retrospective adjustment (effected through the running loan account) whereby rents that had already been collected in respect of the Trust’s property (net of any justifiable expenses) be credited to the Trust and staff instructed that future rent receipts attributable to the Trust (again net of any justifiable expenses) be likewise so credited as they occurred.
My response to the issues in respect of the 1988 audit
Did H&O comply with the applicable auditing standards and legislation?
209Whilst I have concluded that the circumstances were such, at least at 30 June 1988, that a prudent auditor would not in my opinion have found it necessary to qualify the audit report on the OE & DL 30 June 1988 accounts (although I acknowledge that some auditors with more rigid views may well have concluded otherwise), in a technical sense there were some respects in which it could be said there had been a non-compliance with the applicable auditing standards and legislation. Specifically, I refer to the following:
(a)The failure by H&O to follow the guidance provided in AUP 10 – “Planning” by not documenting an audit plan.
(b)The failure to seek more information as to why OE & DR had not accounted to the Trust for rents collected on its behalf, which failure constitute a breach of s 285(4)(a) of the Code as well as a non-adherence to the guidance provided by AUP 14 – “Audit Evidence”.
(c)The failure to report in terms of s 284(4)(b) of the Code that by intermingling Trust transactions with its own, its books had not been properly kept.
If not, what would have been expected of an auditor in the position of H&O?
210In my opinion, whilst I have concluded that an auditor would have acted within the reasonable bounds of acceptable auditing practice by not referring to the matters referred to in paragraph 209 above in the audit report (or likewise by not reporting them to the ASC), in my opinion a prudent auditor would have communicated the concerns I have referred to in paragraph 207 above to senior management of the client as soon as the auditor became aware of those concerns. The communication process and the follow up action that I consider appropriate would have been in accordance with the authoritative guidance provided by AUP 35 to which I have referred in Section IV and Appendix F.
Any other matters?
211In my opinion, given the clear potential for a conflict of interest (either real or perceived) on the part of Des Pope in his dual role as a director (and major shareholder) of OE & DR and his fiduciary role as a director of Nominees, a prudent auditor in the position of H&O (who were also retained as financial auditors) would have raised with Des Pope the desirability of appointing as a director of the trustee company, Nominees, an independent person to represent the interests of the Trust and its beneficiaries, actual and potential and made it clear to that person that that was the reason for their appointment.
Any materials incorporated as particulars by cross-references to other documents must be able to stand as particulars in their own right as if they had been copied into the body of the pleading. Under 87R 47A.05 the defendant is required to plead to the statement of claim including such particulars, and there is no exemption to that obligation merely because they may be given by cross-reference to some other document. The plaintiff’s counsel submitted that at the worst it was only a matter of form and leave to amend could be given on the basis that those paragraphs of Mr Kirk’s report could be copied into the statement of claim. I do not accept this.
The paragraphs of the report, referred to in the particulars, do not satisfy the requirements of 87R 46A.02(a) “to be as brief as the nature of the case permits” and contrary to 87R 46A.02(b) they are a pleading of evidence. They are embarrassing because they assume duties which have not been pleaded, eg the need to comply with particular accounting standards, and they are often expressed as a subjective opinion of Mr Kirk rather than as an objective plea of a breach of a duty. Paragraph 169 of the report suggests that the defendant should have prepared an audit plan, but I fail to follow why that needs to be pleaded in respect of the relief which is claimed.
I have today made the following orders on FDN 45:
1 Application for leave to file an amended statement of claim refused.
2 Costs of the application to be paid by the plaintiff to the defendant.
3I reserve for further argument any applications that such costs be on an indemnity basis or be payable forthwith.
4 Fit for senior counsel.
5 Further directions hearing set for Tuesday 16 February 2010 at 9.30 am.
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