Another chapter in the African Bank saga: The Auditor
By Jerome Veldsman
The Auditor also relied on the common law no reflective loss principle. The SCA upheld that reliance, essentially for reasons similar to that set out in Another chapter in the African Bank saga: The Directors above.
African Bank suffered the primary loss. Assuming that the Auditor wrongfully and negligently or deliberately caused that loss, African Bank would have had statutory and contractual claims against the Auditor for the recovery of the loss. ABIL suffered loss in the second degree. The Shareholders of ABIL, suffered loss in the third degree.
And if the directors of a company wrongfully fail to take the necessary steps against an auditor, any one or more of its shareholders may bring a derivative action, an action by a shareholder, in own name, against the auditor for relief to be granted to the company, the action being one on the company’s behalf.
The SCA also held that the purpose of audit reports is neither to protect the interests of investors nor individual shareholders.
In order to counter the (good) reliance on the no reflective loss principle, the Shareholders relied on section 46(3) of the Auditing Profession Act to found a legal duty to the Auditor, based on the alleged knowledge of the Auditor that the Directors would use the annual financial statements to induce them (the Shareholders) to refrain from exercising their rights as shareholders in a specific way.. That section reads as follows:
On the face of section 46(3), it does appear to assist the Shareholders, but statutory interpretation is for specialists. The SCA noted that the section must be read in the light of section 46(4) of the Auditing Profession Act. That section reads as follows:
Nothing in subsections (2) or (3) confers upon any person a right of action against a registered Auditor which, but for the provisions of those subsections, the person would not have had.
The SCA held that, in the light of section 46(4), section 46(3) does not found a claim where none existed before, so section 46(4) does not “trump” the no reflective loss principle.
The Auditor won.
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