Stanilite Pacific Ltd (in Liq) v Seaton

NEW SOUTH WALES COURT OF APPEAL

CITATION: Stanilite Pacific Ltd. (In Liq) & Anor. v. Seaton and Ors. [2005] NSWCA 301

FILE NUMBER(S):
40444/04

HEARING DATE(S): 20-24 June 2005

JUDGMENT DATE: 14/09/2005

PARTIES:
Stanilite Pacific Limited (In liquidation) - first appellant
SL Electronics (NSW) Pty. Limited (In liquidation) - 2nd appellant
William Henry Seaton and those persons listed in Annexure A to the Notice of Appeal trading as Price Waterhouse - respondents

JUDGMENT OF: Hodgson JA McColl JA Bryson JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): ED50055/01

LOWER COURT JUDICIAL OFFICER: Bergin J

COUNSEL:
Mr. F.M. Douglas QC with Ms. C.E. Adamson SC and Ms. E. Raper for appellants
Mr. I.M. Jackman SC with Mr. M.R. Elliott for respondents

SOLICITORS:
Deacons, Sydney for appellants
Minter Ellison, Sydney for respondents

CATCHWORDS:
CONTRACT
CORPORATIONS
NEGLIGENCE - Liability of auditors - Construction of accounting standards - Earned value method - Duty of auditor in giving consent to inclusion of auditor's report in a prospectus - Extent of duty - Whether auditor's report constituted misleading conduct - Duty of auditor in audit of accounts - Relationship between compliance with accounting standards and a true and fair view of company's financial position - Causation of loss.

LEGISLATION CITED:
Corporations Law 1989 ss.292, 293, 297, 298, 299, 331A, 331AA, 331B, 331D, 995, 999, 1005, 1006, 1032.
Accounting Standard AASB 1009

DECISION:
Short Minutes of Order to be brought in to give effect to reasons.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40444/04
ED 50055/01
HODGSON JA
McCOLL JA
BRYSON JA
Wednesday 14 September 2005

STANILITE PACIFIC LTD (IN LIQ) & ANOR. V. SEATON & ORS. t/as PRICEWATERHOUSE
Headnote

FACTS
In 1990 Price Waterhouse (PW) were appointed auditors of the Stanilite Group, which included Stanilite Pacific as the holding company (Pacific) and a number of subsidiaries, including Stanilite Electronics (Electronics).
On 11 November 1994 Electronics entered into an agreement with Techin Trade Limited for the supply and installation of telecommunication systems in Russia (the Russian contract) for a price of $37 million.
On 3 March 1995, Pacific announced a profit of $4.238 million after tax for the half year to 31 December 1994, which included $6.4 million from the Russian contract.
On or about 13 March 1995, a letter from Mr Seaton of PW to the directors of Pacific raised for consideration certain matters, including “aggressive” revenue recognition on the Russian contract of $6.4 million in profit despite the fact no money had been received as at 31 December 1994.
At a meeting of the Board of Pacific on 16 March 1995, Mr Seaton tabled an audit report signed by him on behalf of PW, and the accounts for the half-year ended 31 December 1994 were signed by the directors.
A subsequent events review to 18 April 1995 by Mr Seaton concluded that no matter had arisen since 31 December 1994 that impacted on accounts or required specific disclosure in a prospectus to be produced for an underwritten rights issue to all shareholders.
Pacific received Mr Seaton’s consent pursuant to s.1032 of the Corporations Law for the prospectus to include his auditor’s report of 16 March 1995. The prospectus was dated 3 May 1995 and contained the financial statements of Pacific and its controlled entities for the half year ended 31 December 1994, the auditor’s report dated 16 March 1995, and information about the Russian contract.
On 27 June 1995, Electronics entered into an agreement for the supply and installation of telecommunications systems in Argentina for a total amount of $33 million.
The unaudited accounts for the year ended 30 June 1995 were tabled at a Board meeting of Pacific on 30 August 1995. These accounts showed an operating profit for Pacific of $6.967 million, of which $5.4 million represented a dividend from Electronics. Using the “recognition of revenue” or “earned value” method of accounting under accounting standard AASB 1009, they also showed an operating profit for Electronics of $10.438 million, which included $11.8 million profit from the Russian contract and $10 million profit from the Argentinean contract. As at 30 June 1995, only $270,000 had been received under the Russian contract, and nothing had been received under the Argentinean contract.
PW gave an unqualified audit opinion for the accounts for the year ended 30 June 1995, which contained a note drafted by Mr Seaton concerning the Russian contract. The Board of Pacific approved the accounts, released them to the ASX, and resolved that a dividend of 4 cents per share be paid out of the profits earned for the year ended 30 June 1995. The accounts were then formally signed at a Board meeting on 26 September 1995. Although the total amount of the dividend was $5.452 million, by reason of Pacific’s dividend reinvestment plan, a net amount of $1.576 million was paid out.
As at 31 December 1995, the consolidated trading results of the Group showed losses of $41.6 million for December and $55.48 million for the year to date. On 22 May 1996, the Board of Pacific resolved to request NAB to appoint a receiver and manager to Pacific and its subsidiaries. A liquidator was appointed on 26 August 1996.
Following liquidation, Pacific and Electronics sued PW for damages arising from the consent to include the auditor’s report in the May 1995 prospectus, and the audit of the 1994-5 accounts. Bergin J dismissed the proceedings, and Pacific and Electronic appealed.
Only certain issues addressed by the primary judge were relevant to the appeal. These included:
(1)The meaning of clause .10 of the AASB 1009, a standard of statutory force. Clause .10 requires the method of recognition of revenue (or “earned value” method) to be used under certain conditions, including the condition that the “total revenues to be received can be reliably estimated”. The primary judge held that this condition could be satisfied without any need to consider whether it was probable that the revenues would in fact be received, and that the method was appropriately used in this case.
(2)The consequential finding of the primary judge was that PW did not breach its duty to or contract with the Group by allowing the inclusion of Mr Seaton’s audit opinion in the prospectus, or in giving an unqualified audit opinion on the 1994-5 accounts.

HELD
(1)The terms “received” and “estimated” in Clause .10 of the AASB justify the interpretation that the condition is satisfied only if the total revenues would probably be received, and the interpretation adopted by Mr Seaton and upheld by the primary judge was incorrect.
(2)However, there were substantial considerations favouring the interpretation of clause .10 of AASB 1009 adopted by Mr Seaton, and there was no breach of duty merely on the basis that his interpretation was incorrect.
(3)PW had a duty to exercise reasonable skill and care in giving consent having regard to the circumstance that there was no requirement to repeat the audit completed on 16 March 1995 for the half year ended 30 December 1994; and it was not shown that, in the period between 16 March 1995 and 3 May 1995 when consent was given, Mr Seaton and PW were negligent in not coming to a different conclusion regarding the compliance of the accounts with accounting standards.
(4)Although liability for misleading conduct in relation to the prospectus consent was possible in the absence of negligence concerning that consent, misleading conduct was not proved.
(5)It was not necessary to decide the issue of causation of loss in relation to the consent.
(6)It was not shown that AASB 1009, on its true interpretation, did not apply in relation to the Argentinean contract for the purposes of the 1994-5 accounts.
(7)In applying AASB 1009 to the Russian contract according to PW’s interpretation of the standard, a reasonable auditor, in order that the 1994-5 accounts give a true and fair view, would have required that provision be made against assets included in the accounts, eliminating $11.8 million of profit. Accordingly, it was a breach of PW’s duty as auditor to give audit approval for these accounts.
(8)It is extremely unlikely Electronics would have declared a dividend, or that NAB would have permitted payment by Pacific, if the $11.8 million had not been included as profit in the accounts. The payment was relevantly caused by PW’s breach of duty.
(9)Accordingly, the appeal should be allowed and there should be judgment in favour of Pacific for $1.576 million, with provision for interest.

**********

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40444/04
ED 50055/01
HODGSON JA
McCOLL JA
BRYSON JA
Wednesday 14 September 2005

STANILITE PACIFIC LTD (IN LIQ) & ANOR. V. SEATON & ORS. t/as PRICE WATERHOUSE

Judgment

HODGSON JA: On 12 May 2004, Bergin J gave judgment in proceedings in which the first appellant (Pacific) and the second appellant (Electronics) sued the respondents (Mr. Seaton and PW) for damages for alleged breaches of duties in acting as auditors. The primary judge dismissed the appellants’ amended summons, and ordered the appellants to pay the respondents’ costs agreed at $2.15 million. The appellants appeal from the whole of that decision.
OUTLINE OF CIRCUMSTANCES
Pacific was the holding company of the Stanilite Group (the Group), founded in 1977 by two brothers, Robert and John Harriss, who were managing directors at all relevant times. Pacific’s shares were listed on the Australian Stock Exchange (ASX) in 1989. It raised capital from time to time for the purpose of making loans to its subsidiaries in the Group, one of which was Electronics.
PW became the appellants’ auditors in 1990, and continued as such until the appellants were placed into liquidation on 26 August 1996.
Prior to 1992, the principal businesses of Electronics were emergency lighting and the supply of communication systems for ten frigates built for the Australian and New Zealand Navies (the ANZAC contract).
In 1992, Electronics expanded its operations into manufacturing and installing telecommunication systems in overseas countries that did not have developed telecommunications infrastructure. These systems included the Cellswitch system, a quite complex system involving mobile phones or radios at one end, and mobile phones, radios or landlines at the other end. The primary judge elaborated on this system, as follows:
Software drives the switch and links the switch to the main network and provides billing information to the operator of the network on a user-generated system. The linkage into the main network may be a cable or wireless connection or it may be a satellite link or microwave. The cellswitch is a component within the system (tr. 583). The telecommunications towers that were constructed were an essential feature to the successful operation of the telecommunications system (tr.319).
In December 1993, the Group decided to transfer its banking business from the ANZ Bank to the National Australia Bank (NAB), as NAB was prepared to offer a facility of $35.2 million, some $5.2 million more than the ANZ Bank was then prepared to offer.
In April 1994, Pacific raised $15.34 million through share placements, and a further $1.324 million through a dividend reinvestment plan.
On 11 November 1994, Electronics entered into an agreement with Techin Trade Limited (Techin), a Delaware USA corporation, for the supply and installation of Cellswitch systems in Russia (the Russian contract), for a price of $US28 million (about $A37 million).
Pacific had requested NAB for an increase in total facilities of $10 million in September 1994. Following various meetings and communications, on 12 January 1995 NAB advised Pacific that it was willing to provide a $10 million temporary overdraft, to be available until 31 March 1995, on condition that steps be taken to raise additional equity of at least $35 million, from which the temporary overdraft was to be cleared. NAB also advised that a further $5 million would be made available on request, but only after entry into an underwriting agreement covering the equity raising.
Pacific advised NAB that it could not conclude the equity raising by 31 March 1995; and NAB wrote to Pacific on 16 January 1995 amending its offer to the effect that Pacific use its best endeavours to achieve an acceptable underwriting agreement by 15 March 1995 for an amount of at least $35 million.
On 18 January 1995, underwriters Burdett Buckeridge & Young (BBY) wrote to Pacific confirming BBY’s willingness to underwrite an equity issue of $35 million, subject to the pricing of the issue; and on the same day the Board of Pacific resolved to accept NAB’s amended offer. It also resolved to invite a representative from NAB to become a member or observer of a Due Diligence Committee established for the purpose of the equity raising.
The first meeting of the Due Diligence Committee occurred on 31 January 1995, and it was attended by Mr. Seaton, a partner of PW, who was identified as the Stanilite auditor. It was decided to recommend to the Board of Pacific that PW conduct a full audit of the accounts for the half year ended 31 December 1994, for the purpose of the rights issue which was part of the equity raising. This recommendation was accepted by the Board.
On 8 February 1995, Mr. Seaton wrote to Pacific, setting out PW’s understanding of their function as auditors for the half year accounts, and asking acknowledgement of Pacific’s agreement or otherwise to this understanding.
On 3 March 1995, Pacific announced to the ASX that there was a profit after tax for the half year to 31 December 1994 of $4.238 million, a marginal increase on the previous comparative period’s net profit of $4.213 million.
On 10 March 1995, Pacific informed NAB that, as at 31 December 1994, two key balance sheet ratios exceeded bank requirements (meaning that Pacific was in breach of the terms of its facility agreement with NAB); and Pacific sought, if possible, confirmation that NAB considered the breaches minor and technical and that no action would be taken.
Between 10 and 13 March 1995, Mr. Seaton, with the assistance of Allan Chan of PW, prepared a letter addressed to the directors of Pacific, setting out a number of matters that “required serious consideration by the directors”. One matter was revenue recognition on the Russian contract, which the letter described as “aggressive”, in circumstances where no money had been received as at 31 December 1994, yet the accounts for the six months ended 31 December 1994 showed $12.8 million in revenue and $6.4 million in profit from that contract, on the so-called “earned value” basis set out in Accounting Standard AASB1009. Another matter was the going concern basis of the accounts, as to which the letter asserted a belief that the accounts should include a note which outlined the cash flow situation, stated that temporary credit facilities had been extended to the Group by its bankers, and stated that as at 31 December 1994 the Group was in breach of borrowing covenants.
This letter was considered at an audit committee meeting attended by Mr. Seaton on 13 March 1995; and Mr. Seaton also attended a Board meeting of Pacific on 15 March 1995.
By letter dated 15 March 1995, NAB advised Pacific that it had agreed to extend its facilities to 28 April 1995 on the same terms and conditions as previously agreed, and confirmed that no action would be taken in relation to the breach of financial undertakings as at 31 December 1994.
At a meeting of the Board of Pacific on 16 March 1995, attended by Mr. Seaton and Mr. Chan, Mr. Seaton is recorded as having said that, in view of the NAB letter, he was of the opinion that the accounts could be signed as a going concern. Mr Chan’s note of the meeting records that the PW letter (referred to above) was used as a basis of discussion, but would not be formally issued. The directors signed the accounts for the half year ended 31 December 1994, and Mr. Seaton tabled an audit report signed by him on behalf of PW in the following terms:
AUDITORS REPORT TO THE MEMBERS OF STANILITE PACIFIC LIMITED
Scope
We have audited the financial statements of the Company for the half-year ended 31 December 1994 as set out on schedule 1 to 5. The financial statements are the consolidated accounts of the economic entity comprising the Company and the entities it controlled at the end of, or during the half-year. The Company’s directors are responsible for the preparation and presentation of the financial statements. We have conducted an independent audit of these financial statements to express our opinion on them in order for the Company to lodge them with the Australian Securities Commission.
Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements are free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly in accordance with applicable accounting standard AASB 1029: Half-year Accounts and Consolidated Accounts and the Corporations Law so as to present a view which is consistent with our understanding of the economic entity’s state of affairs, the result of its operations and its cash flows.
We have not acted as auditors of Stanilite Electronics (NZ) Limited and Stanilite (Hong Kong) Limited. We have, however, received sufficient information and explanations concerning these controlled entities to enable us to form an opinion on the consolidated accounts.
The audit opinion expressed in this report has been formed on the above basis.
Audit opinion
In our opinion, the financial statements of the Company are properly drawn up:
(a) so as to give a true and fair view of:
(i)the state of affairs of the economic entity as at 31 December 1994 and its results and cash flows for the half-year ended on that date; and
(ii)the other matters required by Divisions 4, 4A and 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements;
(b)in accordance with the provisions of the Corporations Law; and
(c)in accordance with applicable accounting standards AASB 1029: Half-year Accounts and Consolidated Accounts.
(It was contended by the appellants that in doing so, Mr. Seaton and PW were in breach of their duty as auditors; but no claim is pressed for damages for that breach, because these proceedings were not commenced until 26 April 2001).
These accounts contained the following statement:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted by Stanilite Pacific Limited and controlled entities are stated to assist in a general understanding of these accounts.
…
(e) Operating Revenue
Sales revenue represents revenue earned from the sale of the economic entity’s products and services net of returns. Sales revenue on long term contracts has been brought to account based upon the percentage of completion. Other revenue includes proceeds from sale of property, plant and equipment, government grants and interest income on short-term investments.
On 23 March 1995, an amount of $US204,000.00 (equivalent to $A270,000.00) was deposited with NAB in New York, this being the only money ever received by Electronics under the Russian contract.
The equity raising of $35 million was to be by an underwritten placement of 6.5 million shares at $1.80 per share, raising $11.7 million to be received by 5 May 1995; and an underwritten 1:5 renouncable rights issue to all shareholders at $1.60 per share, to raise $23 million, to be paid to 80 cents on allotment (July 1995) with the balance of 80 cents payable in November 1995. A prospectus was required for the rights issue.

Mr. Seaton and Mr. Chan conducted a subsequent events review to 18 April 1995 in order to express an opinion as to whether any matters had arisen since 31 December 1994 that had a material impact on the audited accounts; and they concluded that no matter had arisen that impacted on the accounts or required specific disclosure in the prospectus.
On 2 May 1995, BBY wrote to Pacific advising that they had executed an underwriting agreement to support the placement of 6.5 million shares at $1.80 per share, that settlement of the placement was expected on 5 May, and that approximately 19 major domestic and international investment institutions had participated in the placement.
On 3 May 1995, PW wrote to the directors of Pacific giving Mr. Seaton’s consent pursuant to s.1032 of the Corporations Law to the issue of the prospectus with his auditor’s report dated 16 March 1995. (This is the basis of one of the claims in this case.) By another letter of the same date, PW advised that they did not believe that the issue of shares pursuant to the prospectus may involve conduct which was misleading or deceptive.
On the same day, there was a meeting of the Board of Pacific, at which an underwriting agreement with BBY and another underwriter was entered into, and the prospectus was approved.
The prospectus was dated 3 May 1995. As well as containing the financial statements of Pacific and controlled entities for the half year ended 31 December 1994, and the auditor’s report dated 16 March 1995, the prospectus contained among other things the following information about the Russian contract:
Techinfo (Russia) Network Supply Agreement
This contract is dated 11th November 1994 and is between Stanilite Electronics Pty. Limited (“Electronics”) and Techin Trade Limited ("TTL”). TTL is a company incorporated in Delaware, USA. The controlling shareholder of TTL controls the holder of a licence from The Ministry of Communications of the Russian Federation to provide a cellular radio-telephone service in the Krasnodar and other regions of Russia.
Electronics has agreed to supply certain equipment and services necessary to establish and maintain a high capacity local, inter-regional and international wireless telephone system for digital/analogue mobile telephone systems in the Krasnodar region of Russia and in Omsk City. The new telephone system is to be connected to the public subscriber telephone network. The contract includes supply of Software and Electronics has granted TTL a royalty-free licence for use of the software. Electronics is also to provide training for the network operators and maintenance workers. Electronics has agreed to provide software support for a period of one year from the date of commissioning and certifying the system.
The contract envisages several stages, of which only Stage 1 is quantified and confirmed. The contracted value to Electronics of Stage 1, Phase 1 is $US18,656,712 which is for supply of equipment and services. Stage 1, Phase 2 has a contracted value of $US9,857,722 giving a total contracted value of $US28,514,434. Stages 2 and 3 are subject to further purchase orders from TTL, which is likely to depend upon the development of adequate income from Stage 1 and project financing arrangements.
Electronics expects that payment for stage 1 will occur over the next 12 to 18 months. Invoices issued by Electronics are payable progressively according to a formula in the contract based on projected revenue from users of the network once it is functional. Subject to the risks mentioned in Section 6 of this Prospectus and assuming that TTL and Electronics perform their respective obligations under the contract, payment to Electronics will amongst other things, depend upon:

rollout of the system by TTL;
remittance of money from the sale of terminals by regional operating companies to TTL, or directly to Stanilite at the direction of TTL; and
availability of US dollars from the Russian Central Bank.
To date, TTL has paid $US204,000 to Electronics. Electronics anticipates that most of the monies owing under this contract will be paid within 12 months. If the expected rate of sales of terminals is not achieved, Electronics may delay the supply of further equipment until such supply is justified by sales of terminals. Electronics has the right to suspend deliveries and remove equipment if payments are not received at the rate specified in the contract. Ownership of the equipment does not pass until Electronics has received payment in full for the equipment.
Electronics has taken security over certain assets of TTL and certain personal assets of TTL's principal shareholder and controller, but these securities currently have a low value (approximately $US300,000). Electronics has also received a limited ($US1.5 million) guarantee from the Novorossiijsk Sea Trading Port (a major financial backer of TTL) supported by equivalent funds in a Swiss bank account. The legal status of the guarantee is being examined by Stanilite and is presently unclear.
Electronics has taken out EFIC export insurance for 60% of invoice amounts initially up to $7.4 million. This insurance is subject to a number of conditions including that:
all guarantees and securities nominated in the contract be in place by a date to be determined by EFIC;
licences and approvals remain in full force and effect before delivery of equipment onto the Russian sites; and
user terminals have been made available and the goods have been delivered on site in Russia with a Certificate of Acceptance issued.
The company has satisfied the second and third conditions and is in the process of satisfying EFIC in respect of first.
Due to factors set out in Section 6 of this Prospectus, including the under-developed legal system in Russia and difficulties in negotiating and implementing legal (including contractual) protection, enforcement of rights in relation to this contract, if necessary, could be difficult.

It contained the following information about NAB;
National Australia Bank
Stanilite has entered into a Facility Agreement with National Australia Bank limited ("NAB") dated 8th February 1994. Under this Facility Agreement and subsequent amendments, NAB has provided the Company with credit facilities totalling $49.25 million, of which $16.35 million is provided by way of temporary overdraft.
The financial undertakings within the agreement include covenants that the company's:
(a) total external liabilities must not exceed 65% of its total tangible assets;
(b) total current assets must exceed 150% of its total current liabilities;
(c) earnings before interest, tax, finance lease repayments, capital expenditure and research and development expenditure (net of depreciation and amortisation) must exceed 150% of gross interest expense plus finance lease repayments;
(d) aggregate total assets of overseas subsidiaries must not exceed 5% of the aggregate total assets of the group; and
(e) aggregate EBIT of overseas subsidiaries must not exceed 5% of the aggregate EBIT of the group
At 30th June 1994 except for (d) Stanilite complied with all the above covenants. At 31st December 1994 compliance with covenants (b) and (e) was achieved and the NAB waived non-compliance with the others.
The company has drawn down the full amount provided by way of temporary overdraft from NAB. Proceeds from the Placement and the Issue will be used to retire this temporary overdraft in full. Following repayment of the temporary overdraft facility the whole of the facilities provided by NAB will be reviewed by the company and NAB.
It also contained the following information about PW’s consent:
11.8 Expert's Consent
Price Waterhouse have given and have not, before lodgement of this Prospectus with the ASC, withdrawn their written consent to the issue of this Prospectus with their Auditor's Report dated 16th March 1995 on the financial statements of the company for the half year ended 31st December 1994 and reference to the 30th June 1994 annual financial statements included in the form and in the context in which it is included, and to be named in this Prospectus as auditors of Stanilite.
Meanwhile, on 2 May 1995, NAB had advised over the telephone that the temporary overdraft facility of $15 million would be increased by $1.65 million to accommodate $787,000.00 cash required for a dividend payment on 28 April 1995 and immediately pressing creditors, on the basis that on receipt of $11.7 million placement proceeds, the temporary overdraft would be reduced to $10 million. On 22 May 1995, NAB wrote to Pacific offering to extend the facilities to 31 July 1995 on certain conditions, including the appointment of Arthur Andersen as investigative accountants. This was accepted by Pacific on 26 May 1995.
By 8 May 1995, Pacific had received $11.5 million from the share placement; and on 30 June 1995, it received a further $11.5 million being the first instalment from the rights issue.
On 27 June 1995, Electronics signed a contract with Compagnia de Telephonos del Interior (CTI) of Argentina, for the supply and installation of systems in Argentina (the Argentinean contract) for a total consideration of $A33 million.
On 2 August 1995, NAB wrote to Pacific advising that Pacific was in default of the facility agreement in failing to pay $1.5 million by July, and giving an extension to 31 August 1995 to make this payment.
Arthur Andersen reported to NAB on 3 August 1995, expressing the view among other things that, whilst the company was utilising an accounting methodology sanctioned by its auditor, a more conservative accounting approach should be used in determining arrangements with a bank.
It appears that by 9 August 1995, Electronics had received the first payment of about $6 million under the Argentinean contract. On that day, NAB wrote to Pacific noting that, under the terms of its offer of 2 August 1995, the temporary overdraft facility was to be reduced by the whole of that payment. However, following further communications, on 29 August 1995 NAB permitted Pacific to use about one-half of that payment for its own purposes.
The Board of Pacific met on 30 August 1995, and unaudited accounts for the year ended 30 June 1995 were tabled. These accounts showed an operating profit for Pacific of $6.967 million, of which $5.4 million represented a dividend from Electronics; and they showed an operating profit for Electronics of $10.438 million.
However, this profit in Electronics was arrived at after including $11.8 million profit from the Russian contract and $10 million profit from the Argentinean contract. As at 30 June 1995, about $270,000.00 had been received under the Russian contract, and nothing had been received under the Argentinean contract.
The minutes of the Board meeting on 30 August 1995 noted:
Approval of a final dividend for the year was deferred until audit of the accounts was completed, but the Board suggested that an amount of 4 cents per share be provided for in the accounts for this purpose.
On 11 September 1995, Mr. Seaton informed the audit committee that, subject to completion of a number of matters in respect of the audit, he had verified the company’s results for the year ended 30 June 1995. He said he would require the Executive Directors to sign representation letters in respect of the accounts because the company had applied the “earned value” accounting concept to arrive at a profit for the year. He also suggested that, because of the difficulties being experienced with the Russian contract, a suitable note should be included in the statutory accounts to report on progress to date and the future risks associated with the project. Mr. Seaton agreed he would draft the appropriate note for inclusion in the accounts, with the assistance of Mr. Fayle, the Chief Financial Officer of Pacific.
The letter requested by Mr. Seaton was produced, and was dated 26 September 1995. It included the following:
7.            TELECOMMUNCATIONS PROJECTS
The directors are satisfied that proper procedures have been adopted in the recognition of profit on telecommunications projects for which the “earned valued” method of revenue recognition has been adopted. In particular, the directors have taken reasonable steps to ensure that the percentages of completion used in the calculations properly reflects the level of effort incurred on these projects.
We make the following specific representation in relation to the following projects:
(a)          Australian Defence Air Traffic System Projects (“ADATS”)
The directors, to the best of their knowledge, confirm that the contract for the project has been awarded to the economic entity with an estimated value of $26,442,000. The estimated related cost of completion for the project is $18,849,000.
(b)          Technin Trade Limited Network Supply Project (Russia Contract)
The directors have taken reasonable steps to ascertain that the amounts of $23,052,000 representing contract work in progress and $5,738,000 representing trade debtors receivable in relation to the Russia Contract will be realised in full, having regard to the uncertainties described in Note 7 to the financial statements.
A note was drafted concerning the Russian contract, which was included as Note 7 in the accounts for the year ended 30 June 1995, in the following terms:
Work in progress after deducting progress claims includes $8,702,000 (current) and $14,350,000 (non-current) including attributable profits to date, which relate to a contract dated 11th November 1994 (and as subsequently amended) for the installation of a telecommunications system in Russia with Techin Trade Limited (TTL). In addition, an amount of $5,738,000 is included in current trade debtors in relation to progress claims on the contract.
The Group’s ability to receive payment for work on this contract and the timing of those receipts is dependent on:
(i)the approval of the system by Russian telecommunications authorities and its subsequent roll out by TTL;
(ii)remittance of a contracted proportion of the proceeds from the sale of terminals, collection fee and call revenue by regional operating companies to TTL or directly to the economic entity at the discretion of TTL; and
(iii)availability of US dollars from the Russian Central Bank.
The directors have evaluated the technical and commercial risks associated with this contract. The testing of the system by the authorities is under way and the directors believe that approval of the system is imminent, based on company prepared forecasts in relation to the market in which the systems will operate. The directors consider that the allocation of the assets between current and non-current and recognition of the attributable profit is appropriate, notwithstanding the uncertainties inherent in the matters mentioned in the above paragraph.
To date the economic entity has received $269,000 from TTL in relation to the contract. Ownership of the equipment does not pass until payment has been received in full. Export insurance for 60% of the invoiced amounts has been taken out with Export Finance and Insurance Corporation. In addition, the economic entity holds guarantees and other security estimated by the directors to have to (sic) a maximum value of $10 million.
On 11 September 1995, there was a meeting of the Board of Pacific, at which it was noted that the accounts had been reviewed by the audit committee and agreed to in principle by the auditor. That meeting resolved that the Board re-convene on 13 September to formally approve the accounts. At the meeting on 13 September, the Board agreed to release the accounts to the ASX, identified as being subject to final audit, and also resolved that a dividend of 4 cents per share be paid out of the profits earned for the year ended 30 June 1995 on 4 December 1995.
On 26 September 1995, PW gave an unqualified audit opinion for the accounts for the year ended 30 June 1995, containing the note referred to above. At a Board meeting on that day, it was resolved that the directors’ statements in relation to those accounts be signed.
On 13 November 1995, Pacific announced to the market that it was experiencing revenue shortfalls and delays on the Russian contract; and on 23 November 1995, it made a further announcement, referring to a possible write-down of the company’s investment in Russia. It continued:
On the basis of figures presented to the Board today, it seems that a substantial loss is inevitable for the half year to December.
On 1 December 1995, Pacific announced to the market that 90% of the second instalment of the rights issue had been received.
4 December 1995 was the date for payment of the dividend referred to above. The total amount of the dividend was $5.452 million, but by reason of Pacific’s dividend reinvestment plan, a net amount of $1.576 million was paid out. (This net amount is the subject of the second area of claim, based on the audit opinion concerning the 30 June accounts.)
On 8 December 1995, PW provided a report to Pacific concerning its audit of the accounts for the year ended 30 June 1995.
As at 31 December 1995, the consolidated trading results of the Group showed losses of $41.6 million for December and $55.48 million for the year to date.
In the early months of 1996, there was nothing more received under the Russian contract, and there were continuing problems with the Argentinean contract.
On 22 May 1996, the Board of Pacific resolved to request NAB to appoint a receiver and manager to Pacific and its subsidiaries. A liquidator was appointed on 26 August 1996.
CLAIMS OF APPELLANTS
Relevantly to the issues in this appeal, the appellants made two broad claims.
Prospectus Consent
The appellants claimed that Electronics was caused damage by breaches of duty by Mr. Seaton and PW in giving consent to the issue of the prospectus containing the auditor’s report dated 16 March 1995, as being a breach of contract, of a duty of care and of statutory duty, and also by associated misleading conduct by Mr. Seaton and PW.
The most relevant allegations in the final version of the Statement of Claim were the following:
21.          In purported performance of the contracts of general and specific retainer and in discharge of their duty of care, Price Waterhouse represented in relation to the December 1994 audited accounts that:
(a)they had audited the financial statements of Stanilite Pacific and Stanilite Electronics for the half year ended 31 December 1994 to express their opinion on them in order that Stanilite Pacific could raise capital from institutional investors and from the public, the latter via a prospectus;
(b)their audit had been conducted in accordance with Australian Auditing Standards and applicable accounting standards to provide reasonable assurance as to whether the financial statements were free of material misstatement;
(c)the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up so as to give a true and fair view of the statement of affairs of the economic entity as at 31 December 1994 and its results and cash flows for the half-year ended on that date; and the other matters required by Divisions 4, 4A, 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements;
(d)the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with the provisions of the Corporations Law;
(e)the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with applicable accounting standard AASB 1029: Half-yearly accounts and Consolidated Accounts;
(f)Price Waterhouse had engaged in a full audit of the accounts for the half year ended 31 December 1994 in accordance with the letters of engagement dated 8 February 1995, 24 March 1995 and 3 May 1995 respectively from Price Waterhouse to Stanilite Pacific; and
(g)Price Waterhouse had complied with the obligations referred to in the letters of engagement dated 8 February 1995, 24 March 1995 and 3 May 1995 respectively from Price Waterhouse to Stanilite Pacific.
("the First Representations")
Breach
22.          From on or about 16 March 1995 when they provided their initial audit opinion on the December 1994 audited accounts until 3 May 1995 Price Waterhouse breached, and continued to breach, the contract of general retainer, the contract of specific retainer, the duty of care and the statutory duty which it owed to Stanilite Pacific and Stanilite Electronics.
PARTICULARS
I.             Price Waterhouse issued an unqualified audit opinion on the December 1994 audited accounts in circumstances where:
(a)the financial statements showed revenue from a number of risky telecommunications contracts by application of the earned value method, when the method of applying the earned value method was inappropriate for such contracts. The way in which the earned value method was used had the effect of bringing revenue to account when certain unilaterally determined milestones were passed, notwithstanding that the conditions or requirements for recognising revenue under Australian Accounting Standards, including AASB 1009 Accounting for Construction Contracts, had not been met. The work in progress account was debited on each such milestone and the revenue account was credited. Revenue was therefore shown as having been earned before the requisite criteria for revenue recognition under Australian Accounting Standards, including AASB 1009 Accounting for Construction Contracts, had been satisfied;
…
II.           Price Waterhouse failed to properly prepare all necessary qualifications and disclosures in the December 1994 audited accounts.
…
24A.       Price Waterhouse knew or ought to have known, […]:
(a)the accounts as presented by the directors to the auditors did not show a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics;
(b)the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics were not such as would make capital raising from institutional investors or the public, feasible, if a true and fair view of such affairs were presented in the accounts and if they were prepared in accordance with the applicable accounting standards; and
(c)Price Waterhouse ought not sign an unqualified audit report as auditors or state that the accounts represented a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics and that the accounts had been prepared in accordance with applicable accounting standards, unless and until they were amended to take account of the matters referred to in the letter of advice from Price Waterhouse to the directors of Stanilite Pacific dated 13 March 1995.
26.          In the premises Price Waterhouse owed a duty to Stanilite Pacific and Stanilite Electronics to exercise reasonable care in making the First Representantions.
27.          In breach of the duty alleged in paragraph 26 above Price Waterhouse failed to exercise reasonable skill and care in making the First Representations.
PARTICULARS
The plaintiffs repeat paragraphs 22 to 24A above.
29. Each and every one of the First Representations was made in connection with a dealing in securities within the meaning of section 995(2) of the Corporations Law.
30. In making each and every one of the First Representations, Price Waterhouse engaged in conduct that was misleading or deceptive or likely to mislead or deceive, in contravention of the Corporations Law.
The issue raised on appeal concerning the qualifications and disclosures referred to in Particular II above related to a qualification or disclosure concerning the signing of the accounts on a going concern basis.

The appellants also alleged breach of duty by PW in giving consent to the issue of the prospectus containing its audit opinion; and in substance claimed that these breaches caused loss to Electronics, by reason of causing Electronics to continue to trade and to incur additional losses that were ultimately quantified at $28.235 million.
30 June 1995 Audit
The appellants claimed that Pacific was caused damage by the audit opinion on 30 June 1995 accounts, in that Pacific was caused to pay a dividend in a net amount of $1.576 million which it otherwise would not have paid.
The relevant allegations in the Statement of Claim were as follows:
46.          In purported performance of the contract of general retainer and in purported discharge of their duty of care, Price Waterhouse, represented on 26 September 1995 that:
(a)they had audited the financial statements of Stanilite Pacific and Stanilite Electronics for the financial year ended 30 June 1995 to express their opinion on them in order that the directors of Stanilite Pacific and Stanilite Electronics could make proper decisions based on the assumption that the audited accounts were prepared in accordance with applicable accounting standards and constituted a true and fair view of the companies' financial affairs as at 30 June 1995;
(b)their audit had been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements were free of material misstatement;
(c)the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up so as to give a true and fair view of the statement of affairs of the economic entity as at 30 June 1995 and its results and cash flows for the financial year ended on that date; and the other matters required by Divisions 4, 4A, 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements;
(d)the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with the provisions of the Corporations Law; and
(e)the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with applicable accounting standards.
("the Second Representations")
Breach
47.          From on or about 26 September 1995 when they sent the June 1995 audited accounts to Stanilite and Stanilite Electronics, Price Waterhouse breached, and continued to breach, the contract of general retainer, the statutory duty and the duty of care which they owed to Stanilite Pacific and Stanilite Electronics.
PARTICULARS
I.             On or about 26 September 1995, Price Waterhouse issued an unqualified audited opinion on the June 1995 audited accounts in circumstances where:
(a)the financial statements showed revenue from a number of risky telecommunications contracts, including the Argentinian (sic) contract by application of the earned value method, when the method of applying the earned value method was inappropriate for such contracts. The way in which the earned value method was used had the effect of bringing revenue to account when certain unilaterally determined milestones were passed, notwithstanding that the conditions or requirements for recognising revenue under Australian Accounting Standards, including AASB 1009, had not been met. The work in progress account was debited on each such milestone and the revenue account was credited. Revenue was therefore shown as having been earned before the requisite criteria for revenue recognition under Australian Accounting Standards, including AASB 1009, had been satisfied;
…
II.           Price Waterhouse failed to properly prepare all necessary qualifications and disclosures in the June 1995 audited accounts.
48A.       Price Waterhouse knew […] that:
(a)the accounts as presented by the directors to the auditors did not show a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics;
(b)the June 1995 audited accounts were flawed and ought not to have been used as basis for further action; and
(c)Price Waterhouse ought not sign the accounts for the year ended 30 June 1995 or represent that they represented a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities including Stanilite Electronics or that they had been prepared in accordance with applicable accounting standards unless and until they were amended to take account of the matters referred to in the letter from Price Waterhouse to the directors of Stanilite Pacific dated 8 December 1995.
50.          In the premises Price Waterhouse owed a duty to Stanilite Pacific and Stanilite Electronics to exercise reasonable care in making the Second Representations.
51.          In breach of the duty alleged in paragraph 50 above Price Waterhouse failed to exercise reasonable skill and care in making the Second Representations.
PARTICULARS
The plaintiffs repeat paragraphs 47, 48 and 48A above.
STATUTORY PROVISIONS
At material times, the Corporations Law 1989 (the Law) had the following provisions concerning financial statements, in Part 3.6:
292.        Subject to section 293A, a company's directors shall, before the deadline after an accounting period, cause to be made out a profit and loss account for that accounting period that gives a true and fair view of the company's profit or loss for that accounting period.
293.        Subject to section 293A, a company's directors shall, before the deadline after an accounting period, cause to be made out a balance-sheet as at the end of that accounting period that gives a true and fair view of the company's state of affairs as at the end of that accounting period.
297(1)     A company's directors shall ensure that the company's financial statements for an accounting period comply with such of the prescribed requirements as are relevant to the financial statements.
298(1)     Subject to section 297, a company's directors shall ensure that the company's financial statements for an accounting period are made out in accordance with applicable accounting standards.
299(1)     If a company's financial statements for an accounting period, as prepared in accordance with sections 297 and 298, would not otherwise give a true and fair view of the matters with which this Part requires them to deal, the directors must add such information and explanations as will give a true and fair view of those matters.
(2)          Nothing in subsection (1), or in section 297 or 298, limits the generality of a provision of this Division or of Division 4 or 4A, other than this section or section 297 or 298.
The accounting standard most relevant to this appeal is AASB 1009, entitled Accounting for Construction Contracts, as it was in 1995. The relevant provisions of that standard are the following:
Statement of purpose
.03          The purpose of this accounting standard is to require in respect of construction contracts in progress -
(a)profits to be progressively brought to account;
(b)losses to be brought to account as soon as they are foreseeable; and
(c)the disclosure of material information
so that users entitled to rely on the accounts or group accounts are able to assess the financial effects of those contracts on the company or group of companies.
Interpretation
.04 (1) This standard is to be interpreted in accordance with the Corporations Law, including Parts 1.2 and 3.6. The endorsed explanatory material contained in this standard can be used, subject to section 109J of the Corporations Law, as an aid to interpreting the accounting standards contained in this standard.
(2) Except for the citation of a replaced or superseded standard in an application clause, any reference to this standard to a standard approved by the Accounting Standards Review Board shall be taken to include the standard as subsequently amended or replaced by a standard made by the Australian Accounting Standards Board as it applies to the financial year for which the accounts and group accounts are being prepared.
Definitions
.06          In this approved accounting standard unless the contrary contention appears -
…
“cost plus contract” means a construction contract where the contractor agrees to be reimbursed for agreed costs, plus an additional amount whether calculated as a fixed fee or as a percentage of agreed costs;
“fixed price contract” means a construction contract where the contractor agrees to a fixed total contract price or to a fixed charge per unit of work, whether or not such contract includes a rise and fall clause;
Fixed price contracts
.10          The amount of profit on fixed price contracts shall be brought to account in accordance with the percentage of completion method when all of the following conditions are satisfied -
(a)total contract revenues to be received can be reliably estimated;
(b)the costs to complete the contract can be reliably estimated;
(c)the stage of contract completion can be reliably determined; and
(d)the costs attributable to the contract to date can be clearly identified and can be compared with prior estimates.
Cost plus contracts
.11          The amount of profit on cost plus contracts shall be brought to account in accordance with the percentage of completion method when all of the following conditions are satisfied -
(a)the costs attributable to the contract to date can be clearly identified;
(b)costs other than those that are specifically reimbursable under the contract can be reliably estimated; and
(c)where payment under the terms of the contract is calculated by reference to the stage of completion – that stage can be reliably determined.
Conditions not satisfied
.12          If the conditions specified in clause .10 or clause .11, whichever is appropriate to the form of contract used, are not satisfied, either at the inception of a construction contract or during the course of a contract, no profit shall be brought to account until they are so satisfied.
Provision for foreseeable losses
.20          A material loss on a construction contract, whether in relation to work completed or yet to be completed, shall be brought to account as soon as it is foreseeable.
Variations and penalties
.40          Amounts recoverable in respect of claims and variations shall be brought to account as revenue where the following conditions are satisfied -
(a)there is reasonable assurance that additional revenue will result from such claim; and
(b)the amount recoverable can be reliably estimated.
COMMENTARY
Approach of AASB 1009
(i)The percentage of completion method provides a measure of periodic accomplishment. Application of the percentage of completion method involves estimates, particularly in respect of revenue and costs. This accounting standard requires that periodic profit on a construction contract is to be determined on the percentage of completion basis and brought to account when progress on the construction contract permits the outcome of a contract to be reliably estimated. This may occur in some circumstances only on completion of the contract.
Measurement of the percentage of completion
(ii)The percentage of completion method can be measured in three ways -
(a)physical estimates or surveys of the work performed to date;
(b)the costs basis – this method involves calculating the proportion that costs incurred to date bear to the estimated total costs of the contract; and
(c)the billings basis – this method involves calculating the proportion that billings to date bear to the total estimated billings for the contract and should only be applied when it provides a reliable measure of work performed.
(iii)When the percentage of contract completion is measured using the cost basis, adjustments are to be made to include only those costs that reflect work performed. Examples of items which may need adjustment are -
(a)materials purchased that have not been installed or used in the contract performance;
(b)payments to subcontractors to the extent that they do not reflect the amount of work performed under subcontracts; and
(c)penalties incurred by the contractor.
Costs of construction contracts
(iv)The costs incurred by a company or group that undertakes construction contracts can be divided into -
(a)   costs that relate directly to a specific contract, for example:

direct labour costs (labour employed specifically on a contract including direct supervision);
direct materials (materials used in the contract);
depreciation of plant and equipment used on a contract;
costs of moving plant and equipment to and from a site;
expected warranty costs.
(b)costs that are attributable to the contract activity in general and are capable of being allocated on a reasonable and consistent basis to specific contracts, for example:
tender preparation;
insurance;
design and technical assistance;
project overheads.
(c)costs that relate to the activities of the company or group generally, or that relate to contract activity generally and are normally not related to specific contracts; for example:
general administration and selling costs;
finance costs;
research and development costs;
depreciation of idle plant and equipment.
(v)Costs referred to in paragraph (iv)(c) are usually excluded from accumulated contract costs because they do not relate to reaching the present stage of completion of a specific contract. However, in circumstances where such costs are capable of being attributed to a particular contract they may be included as part of accumulated contract costs.
Provision for foreseeable losses
(vi)When current estimates of total contract costs and revenues for any contract indicate that a material loss is probable, the loss is to be brought to account regardless of the amount of work performed on the contract.
Periodic review of profit and construction work in progress
(vii)Application of the standard necessarily involves periodic assessment of the percentage of completion reached and of the total estimated profits on a contract. The profit brought to account in any one period may reflect an adjustment to the profit on the contract previously brought to account. In addition the application of the standard requires that the amount of construction work in progress carried in the balance sheet be reviewed regularly. Any amount not recoverable is required to be written off.
Claims by the contractor
(viii)In some contracts a contractor may claim compensation, in addition to the agreed contract price, for customer caused delays, errors in specification and design or for other reasons which were unforeseen and which resulted in additional cost to the contractor. The existence of possible claims may be known before completion of the contract, or may only emerge after the physical completion of the contract. These claims may not be settled for the amount which the contractor originally proposes as fair compensation as the ultimate amount to be collected depends on many factors, including the contractor’s negotiating ability, the financial strength of the two parties, and the cost implications of possible litigation.
Variation orders
(ix)A variation order involves a change in the scope of the work to be performed under the contract. Variation orders include changes in the method or manner of the work, changes in specifications or designs and changes in the period of completion of the work. Variation orders can be initiated by either the contractor or the customer. They may also be priced or unpriced. Unpriced variation orders define the work to be performed, but the adjustment to the contract price is to be determined at a later date.
(x)Where variation orders are priced and agreed upon by the parties to the contract, the contract revenues and costs are to be adjusted to reflect the variation order.
(xi)Contractor initiated changes have the attributes of a claim and are to be evaluated in the light of the criteria specified in clause .40.
(xii)Additional revenue from unpriced customer initiated changes are to be brought to account on the basis specified in clause .40.
Penalty clauses
(xiii)Many construction contracts contain provision for penalties for falling short of various performance standards stipulated in the contract, for example, failure to complete the contract by the stipulated date. Such penalties are to be brought to account as costs when it is probable that the criteria specified in the contract as minimum levels of performance will not be met.
Reward clauses
(xiv)A limited number of construction contracts include reward clauses for bettering the specified performance standards. Revenues from such clauses are required by the standard to be brought to account when there is reasonable assurance that the criteria specified in the contract have been met.
Performance guarantees
(xv)Many construction contracts require that security be given by the contractor to the client before commencing the contract guaranteeing the performance of the contractor during the construction and maintenance periods. The security may take several forms, including:
(a)lodging of assets (including cash, government bonds or inscribed stock); and
(b)third party guarantees (including bank guarantees, insurance bonds or insurance guarantee policies).
Retention allowances
(xvi)Retention allowances are amounts of contract revenue which have been included in progress billings and have been withheld from payment by customers until a final acceptance of satisfactory completion of the job or the end of a specified period. They are brought to account as amounts receivable from customers.
Advances on account of construction work in progress
(xvii)Advances on account of construction work in progress are a liability of the contractor.
Disclosure of accounting policies
(xviii)As is required under ASRB 1001 “Accounting Policies – Disclosure” the summary of accounting policies included in the accounts or group accounts will provide details of all policies which have been significant in the preparation and presentation of accounts and group accounts. The summary will therefore include all material details of the basis used to bring to account profits on construction contracts. This could include, for example, details of the minimum percentage of completion at which profits are initially brought to account in respect of contracts for various kinds of construction work.
Examples of construction contracts
(xix)Examples of construction contracts include, but are not limited to, contracts for general building, heavy earth moving, dredging, demolition, dams, pipelines, tunnels, ships and transport vessels.

The Corporations Law at the relevant time contained the following provisions concerning auditor’s reports:
331A(1) A company's auditor must report on:
(a)          the company's financial statements for an accounting period; and
(b)          the company's accounting records and other records relating to those financial statements.
331AA(1)              Subject to this section, sections 331B, 331C, 331D and 331E must be complied with in relation to the report.
(2) If the accounting period is a half-year, the report may instead:
(a)state whether, as a result of a review of the financial statements, any matter has come to the auditor's attention that causes the auditor to believe that they are not drawn up as mentioned in subsection 331B (1); and
(b)if a matter or matters have so come to the auditor's attention that cause the auditor so to believe - include a description of the matter or matters and a statement of the auditor's reasons for that belief.
(3)          If the report complies with subsection (2), sections 331B, 331C, 331D and 331E do not apply to the report.
331B(1)   The report must state whether or not, in the auditor's opinion, the financial statements are properly drawn up:
(a)so as to give a true and fair view of the matters with which Divisions 4, 4A and 4B of Part 3.6 require them to deal (or, in the case of a prescribed corporation as defined by section 408A, with which Part 3.6 requires them to deal); and
(b)in accordance with this Law; and
(c)in accordance with applicable accounting standards.
(2)          If, in the auditor's opinion, the financial statements are not drawn up in accordance with a particular applicable accounting standard, the report must give particulars of the quantified financial effect on the financial statements of failing to draw them up in accordance with that accounting standard.
(3)          If the auditor is not satisfied about a matter referred to in subsection (1) or (2), the report must state why not.
331D      The report must describe:
(a)any defect or irregularity in the financial statements; and
(b)any matter that the financial statements do not set out and to which one must have regard in order to obtain a true and fair view of the matters with which the financial statements deal.

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LAST UPDATED: 16/09/2005

[2005] NSWCA 301

14 September 2005

Key Legal Topics

Areas of Law

Commercial Law

Negligence & Tort

Contract Law

Legal Concepts

Duty of Care

Causation

Reliance

Breach

Negligence

Statutory Construction