8/6/2019 Axiam Holdings Limited v Deloitte and Touche

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Axiam Holdings Limited v Deloitte and Touche

Hearing date: 16 May 2005Judgment date: 1 June 2005

Auditor duty to third parties s 20(9) of Act 80 of 1991 exception to claimbased on negligent misstatement by omission held to be sustainable on thepleadings premature to decide question of wrongfulness.

FACT: Deloitte & Touche ("Deloittes") were appointed to conduct an audit and prepare the annual

financial statements for the year ending 31 March 1999. On 1 July 1999 Deloittes issued an Auditors

Report which included a certificate containing the following:

"We conducted our audit in accordance with the South African Auditing Standards. Those standards

require that we plan and perform the audit to obtain reasonable assurance that the annual financial

statements are free of material misstatements

In our opinion, these annual financial statements fairly present, in all material respects, the financial

position of the company at 31 March 1999 and the results of its operations and cash-flow for the period

then ended in accordance with generally accepted accounting practice and in the manner required by

the Companies Act".

The appellant contended that, the statements prepared for the 1999 year failed to fairly present the

financial position of the company that Deloittes, in conducting the audit and completing the financial

statements, failed to comply with the requisite professional and reasonable skill and care and failed to

comply with generally accepted accounting practice and that Deloittes, therefore conducted the audit

and certifying process of the 1999 statements negligently.

During February 2000, two companies ("the third parties") concluded agreements with the company. It

was argued for the appellant that at the time, Deloittes were aware of the negotiations and that the

1999 statements and audit opinion would be relied on by the two companies in that process. It was

further argued that "Deloitte knew, alternatively, could in the circumstances reasonably have been

expected to know, that the two companies, in deciding to conclude the agreements, would rely on the1999 statements and Deloittes audit opinion and knew, alternatively, could in the circumstances

reasonably have been expected to know that the 1999 statements contained the misstatements and

misrepresentations referred to above".

It was then argued that in the premises Deloittes owed the two companies a duty to warn them that the

1999 statements and the audit opinion were incorrect, alternatively to warn them that they had not

conducted the audit properly and that they should not rely on the 1999 statements and the audit

opinion. Deloittes failed to issue these warnings and it was argued that such failure was negligent and

constituted a representation within the meaning of Section 20(9)(b)(ii) of the Public Accountants and

Auditors Act 80 of 1991 that the financial statements were accurate and fairly represented the financial

position of the company at the end of March 1999.

It was contended that due to Deloittes' breach of the aforesaid duty an amount of money was paid tothe company in terms of the agreements referred to earlier. The amounts are irrecoverable.

Deloittes accepted to the claim of the summons on the following basis -

The conclusion that Deloittes owed the two companies a duty in law did not follow on either of the

premises set out in italics in the paragraph above; its failure to warn the contracting companies was

insufficient in law to constitute a representation within the meaning of Section 20(9)(b)(ii) of the Public

Accountants and Auditors Act 80 of 1991.

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An exception is a procedure whereby a litigant contends that a pleading is bad in law. In this case,

Deloittes contended that the appellant's claim did not give rise to a claim in law.

JUDGEMENT:

On 1 June 2005 the Supreme Court of Appeal handed down judgment in Axiam Holdings Limited v

Deloitte & Touche . In an action in the Johannesburg High Court Axiam Holdings claimed damages in an

amount of R241 069 222-43 from Deloitte and Touche, on the basis of an alleged negligent audit by the

latter of the financial statements of the Business Bank Limited for the financial year ending 31 March

1999.

It was alleged by Axiam that the Business Banks financial statements misrepresented its nett worth

reflecting a nett profit before tax of R29 266 176-00 whereas, in fact, it had suffered a nett loss of R77

899 201-00. The third party from whom Axiam obtained title to sue, in subsequently purchasing the

Business Bank Limited, relied on an audit certificate by Deloitte and Touche in terms of which it certified

that the financial statements fairly presented the Business Banks financial position. It was Axiams case

that Deloitte knew or ought to have known that reliance was to be placed on the certification and that

in the circumstances had a duty to warn the third party about the inaccuracies in the financial

statements.

Deloitte and Touche excepted to Axiams particulars of claim on the basis that, on the facts presented, itdid not owe the purchaser a legal duty to inform it of the errors in the financial statements of the

Business Bank Limited and that the failure to warn the purchaser was insufficient in law to constitute a

representation in terms of s 20(9)(b)(ii) of the Public Accountants and Auditors Act 80 of 1991.

In the Johannesburg High Court Schwartzman J partially upheld the exception. He held that, insofar as it

was alleged that Deloitte and Touche knew that its certification was incorrect and knew that the third

party was going to rely on it in concluding an agreement to purchase the Business Bank Limited, that

issue should proceed to trial. He held, however, that insofar, as it was alleged that Deloitte and Touche

was negligent in that it ought to have known about its incorrect certification, the flaw in the reasoning

was that when the audit was completed Deloitte and Touche did not owe the purchaser a legal duty and

could therefore subsequently not have such a duty.

In this Court it was held (Cloete and Heher JJA dissenting) that the Johannesburg High Court had erredby deciding prematurely, at exception stage, without the benefit of all the facts that might emerge at

trial that no such duty could be said to exist. It was held that on the face of the pleadings the claim was

sustainable and that the matter should proceed to trial on that issue. The Johannesburg High Courts

judgment was substituted accordingly.

From: The Registrar, Supreme Court of Appeal