David Yule

Livent Inc., through its special receiver, sued its former auditor, Deloitte & Touche, for negligence and breach of contract in failing to detect a massive fraud perpetrated by Livent's senior management.

The trial judge found Deloitte negligent in its conduct of the 1997 audit and awarded Livent $118 million in damages.

Deloitte appealed, arguing that the ex turpi causa and corporate identification doctrines barred the claim, and that its negligence did not cause the losses.

Livent cross-appealed the trial judge's refusal to award damages for the 1996 audit and the 25% reduction for contingencies.

The Court of Appeal dismissed both the appeal and cross-appeal, holding that the ex turpi causa doctrine could not shield an auditor from liability for failing to detect the very fraud it was engaged to uncover, and that Deloitte's negligence was the proximate cause of Livent's increased liabilities.

Livent Inc., through its Special Receiver, sued its former auditors, Deloitte & Touche, for negligence and breach of contract in failing to detect massive corporate fraud perpetrated by Livent's directing minds, Garth Drabinsky and Myron Gottlieb.

The court found that Deloitte failed to conduct its 1996 and 1997 audits in accordance with generally accepted auditing standards (GAAS), particularly regarding preproduction costs and complex revenue transactions.

The court rejected Deloitte's defences based on the corporate identification doctrine and ex turpi causa, holding that the fraud of the directing minds could not be attributed to the company to shield the negligent auditors.

Damages were assessed at $84,750,000, representing the increase in Livent's liquidation deficit caused by the delayed discovery of the fraud, discounted by 25% for business contingencies.

The Institute of Chartered Accountants of Ontario (ICAO) appealed a Divisional Court decision that quashed professional misconduct convictions against three auditors regarding their 1997 audit of Livent Inc. The auditors cross-appealed the Divisional Court's decision upholding other convictions.

The Court of Appeal allowed the ICAO's appeal, finding that the Discipline Committee did not breach procedural fairness and provided adequate reasons for its findings of misconduct.

The Court also held that subsequent legislative amendments retroactively validated the Discipline Committee's costs award.

The auditors' cross-appeal was dismissed, and the Discipline Committee's original decisions and penalties were reinstated.

The applicants, three chartered accountants, sought judicial review of decisions by the Discipline Committee and Appeal Committee of the Institute of Chartered Accountants of Ontario finding them guilty of professional misconduct in relation to the 1997 audit of Livent Inc. The Divisional Court granted the applications in part.

The Court quashed the convictions on charges 1(i) and 1(iii) due to a breach of procedural fairness, as the applicants were convicted based on their treatment of a 'Put' agreement which was not part of the charges or the case they had to meet.

The Court also quashed the convictions on charges 1(iv) and 2(viii) as unreasonable.

However, the Court upheld the convictions on charges 2(ii), (iii), (iv), and (v), finding it was reasonable for the committees to conclude the auditors failed to exercise appropriate professional scepticism.

Finally, the Court quashed the costs award, holding that the Discipline Committee lacked jurisdiction to order costs because its by-law conflicted with the requirements of the Statutory Powers Procedure Act.