Findlay v DSHE Holdings Limited

Supreme Court of NSW|2019-12-12|Before: Ball J

Solicitors: Corrs Chambers Westgarth (Plaintiffs 2017/294069) Johnson Winter & Slattery (Plaintiffs 2018/52431) Clifford Chance (Fourth to Four Hundred & Fifty Seventh Defendants) File Number(s): 2017/294069 & 2018/52431

Introduction

On 12 December 2019, I heard an application by the plaintiffs in proceedings 2017/294069 and 2018/52431 (the Representative Proceedings) to file a further amended joint statement of claim (FAJSC) and to file a supplementary expert report of Mr Andrew Archer dated 25 October 2019. The FAJSC seeks to amend the plaintiffs' claims against the fourth to four hundred and fifty seventh defendants (Deloitte) in three respects. Mr Archer's supplementary report is relevant to one of those amendments.
At the time of hearing the application, I indicated my attitude to one of the proposed amendments and said that I would reserve my judgment in relation to the other two. Subsequently, the plaintiffs notified my Associate that they no longer pressed a second amendment, at least in the form sought at the time of the hearing, leaving only one amendment or group of amendments to be dealt with. Mr Archer's report is relevant to those amendments. This judgment deals with those amendments and whether the plaintiffs are entitled to rely on that report.
Some of the background to the proceedings and the claim against Deloitte is set out in a judgment delivered by me in relation to an application by Deloitte to strike out an earlier version of the claim against it: see Findlay v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation); Mastoris v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation) [2019] NSWSC 394. This judgment assumes knowledge of that background and uses the same abbreviations.

The amendments in relation to prior year audits

The remaining amendment or group of amendments involves the inclusion of paras 506A and 509A in the statement of claim and a number of consequential amendments.
Leaving the particulars aside, para 506A is in the following terms: To the extent that the deficiencies pleaded above in Part C.2 in respect of FY13 had not been identified by Deloitte as part of the FY13 Audit, but as part of the FY14 Audit Deloitte had communicated the matters pleaded in paragraph 506(a) to DSH's management and those charged with governance; (a) Deloitte would have recognised that DSH's Inventory Practices and Effects as pleaded in Part C.2 in respect of FY14 were, by their nature, unlikely to be isolated to FY14; (b) Deloitte would have communicated to DSH's management and those charged with governance the fact that DSH's Inventory Practices and Effects as pleaded above in Part C.2 in respect of FY14 were unlikely to be isolated to FY14, such that further analysis of DSSH's Inventory Practices and Effects in FY13 needed to be undertaken by management to determine whether the misstatement may be present in prior periods; (c) further analysis of DSSH's Inventory Practices and Effects in FY13 would be performed by management, which would in turn reveal that DSSH's Inventory Practices and Effects were as pleaded above in Part C.2 in respect of FY13.
Paragraph 507 then pleads that had Deloitte communicated the matters pleaded in para 506 (concerning defects in the FY14 Financial Statements) and 506A to DSH's management and those charged with its governance, then one of two things would have happened. First, the FY14 Financial Statements would have been corrected, with the result that the market price would have reflected the true value of the shares at the time. Second, if that had not happened, Deloitte would have issued a qualified audit report with the same consequences.
Paragraph 509A mirrors 506A, except that it is concerned with FY15 and FY14. For that reason, it is only necessary to focus on para 506A.
The supplementary report of Mr Archer fleshes out what are said to be the obligations of an auditor who discovers an error in one year that may have carried over from previous years, which supports the allegations in para 506A (and para 509A).
I am not prepared to permit the amendments. As a result, I would not permit the plaintiffs to rely on the supplementary report of Mr Archer.
The difficulty with the amendments is that it is unclear where they lead. As Deloitte point out, the amendments only have practical significance if it is found that Deloitte failed to comply with their obligations in respect of its audit of the FY14 Financial Statements but complied with their obligations in respect of the FY13 Financial Statements. If they failed in respect of both years, then they are liable for the consequences of both failures. The amendments seek to make Deloitte liable in respect of any misstatements in the accounts for both years, even though they only failed to comply with their duties in respect of the later year. However, neither the amendments nor Mr Archer's report gives any indication of what it is alleged Deloitte ought to have done and did not do and what further analysis management would have undertaken that would have revealed the defects in the prior year's accounts in circumstances where if the amendments are to have any utility it must be assumed that the audit for that year was conducted satisfactorily.
Moreover, neither the amendments nor Mr Archer's report gives any indication of what consequences would have followed if it had been discovered that the error first discovered in respect of the FY14 Financial Statements also infected the earlier Financial Statements. Mr Archer states in his supplementary report that a note would have been included in the FY14 Financial Statements describing the impact of the prior year errors and an emphasis of matter opinion would have been included in the audit report drawing attention to that note. However, the question, then, must be what effect that would have had on the value of the shares. That is a different question from the question of what the effect would have been on the value of the shares if both the FY13 Financial Statements and the FY14 Financial Statements had been corrected.
It follows from what I have said, that the proposed amendments open up two areas of factual enquiry. The first is what an auditor acting reasonably and in accordance with his or her professional duties would have done if he or she had discovered the errors in the later year but acting reasonably and in accordance with those duties did not do so in the prior year, and what effect that would have had on the later year financial statements. The second is, assuming that the financial statements would have been amended in some way, what effect that would have had on the value of the shares in DSH.
On the material before me, it appears that the plaintiffs have not served any evidence that goes to those matters. The plaintiffs have not sought leave to adduce any additional evidence. But without additional evidence, the amendments seem futile. Even if that is not correct, the amendments raise two substantial issues that Deloitte would need to be given an opportunity to address. Any investigations it undertook would need to be sequential. That is, it would be necessary for Deloitte to obtain expert accounting and auditing advice on what further audit enquiries would have been undertaken, what those enquiries would have revealed, and what effect they would have had on later year accounts. It would then be necessary to obtain expert advice on what effect that would have had on the value of the shares. In my opinion, it is neither reasonable nor practical to expect Deloitte to undertake those enquiries before the hearing, particularly when the precise case they have to meet is not identified by the proposed amendments or the evidence.

Conclusion

It follows that the plaintiffs should not be permitted to amend the statement of claim by including paras 506A and 509A and any consequential amendments or to rely on the supplementary report of Mr Archer dated 25 October 2019.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 December 2019

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