Shire of Frankston and Hastings v Cohen

The history of Pt. XVI was traced for us by Mr. Newton. The origin of the provisions therein contained seems to have been the Municipal Corporations Act of 1835 (5 & 6 Will. IV, c. 76) and provisions based upon that Act came into the local government legislation of Victoria in 1863 (27 Vic. No. 176) which followed like provisions made for road districts by an Act of 1853 (16 Vic. No. 40). It is not necessary to set out this history in detail but two things have a present significance. The first is that originally, auditors were elected from among those capable of election as members of district boards or municipal councils, as the case may be, by those qualified to vote for board members or councillors. The election of auditors remained until 1891 when it was replaced by the present system of appointment by the Governor in Council. An intermediate step had been taken in 1874 when provision was made for an auditor appointed by the Governor in Council to act with elected auditors. The second is that the Act of 1863 conferred upon district boards the right to appeal to a court of general sessions against any disallowance of any part of its accounts by the auditors. This provision disappeared in 1869 at the same time as provision was made for special auditors to give the certificates to be mentioned hereafter.

The provisions of Pt. XVI which I have summarized relate to what I may describe as an annual audit of the accounts of the municipality. Part XVI, however, provides for other means of investigating the accounts of municipalities and it is necessary to refer to these shortly. In addition to the annual audit, provision is made for the Governor in Council to direct a continuous audit of the accounts of a municipality or, in specified circumstances, a special audit. Provision was first made for continuous audit in 1934 but there is no express provision relating to the duties of a continuous auditor. Those are left to inference. Provision for special audit was made as far back as 1863 and from the beginning it has been the duty of special auditors to report to the Government, now a Minister but formerly the Governor. In 1869, as previously mentioned, it became the duty of a special auditor to certify whether there had been any misapplication of the moneys of the municipality either wilfully or through culpable negligence and if so, whether any councillors were privy thereto. As the Act stood in 1946, upon confirmation of such a certificate by the Governor in Council, it becomes conclusive evidence of the fact of the misapplication of moneys, of the amount misapplied and the liability of the councillors named. Such sums may be recovered from any councillors named at the suit of a law officer or a ratepayer and whatever is recovered goes into a fund depleted by the misapplication. All this is provided for by ss. 497 and 498. The costs of special audit are payable as the Governor in Council may order out of (a) moneys appropriated by Parliament, (b) money deposited as security upon request for a special audit, or (c) municipal fund (s. 500).

In addition to providing for audit, Pt. XVI provides for the payment of two inspectors of municipal accounts to whom any municipality is bound at any time to produce its accounts for inspection. Although there is no express provision it is to be inferred from the Act that inspectors, who are paid out of moneys appropriated by Parliament for the purpose, report to the Governor in Council and not to the municipality whose accounts are inspected.

To complete this review of the provisions of Pt. XVI, it is necessary to add that auditors and inspectors are given the very wide powers of inquisition set down in ss. 490-492.

This review of Pt. XVI warrants the following conclusions: -

(1) Auditors, whether elected or appointed by the Governor in Council, are auditors of or for the municipality and the method by which a person becomes an auditor for a municipality is not really significant, in determining his relationship to the municipality. No distinction can be drawn between an elected auditor and an appointed auditor apart from the mode of removal. It is, for instance, not to be thought that between 1874 and 1891 when there were elected auditors and an appointed auditor the duties of the appointed auditor were different from those of the elected auditors.

(2) The relationship between a municipality and its auditors is not and never has been contractual. Whatever duties an auditor owes to the municipality depend upon the character of the office and not upon any bargain between the municipality and the auditor.

(3) The auditor for a municipality is a watch dog upon the council and its officers for the benefit of the municipality as an authority of the State and of those who deal with it whether as ratepayers or otherwise.

(4) The fact that the old system of the election as auditors of persons without special qualifications was replaced by a system whereby auditors with special qualifications are appointed by the Governor in Council betokened Parliament's acceptance of the position that if a person is to perform the task of auditing the accounts of a municipality he must be both disinterested and expert.

(5) The expert knowledge required of an auditor is the ability to determine whether the accounts of a municipality are complete, true and correct.

Although the acceptance of these conclusions does not necessarily require the further conclusion that an auditor is under a duty to the municipality to conduct the audit honestly and with reasonable skill and care, it does seem to me to justify such a conclusion. The facts that the Governor in Council appoints a qualified person to be an auditor for the municipality, that the results of the audit have to be communicated to the municipality and that it is the municipality that is bound to pay the auditor his remuneration, seem to me to point to the establishment of a relationship which has as an element the duty of the auditor to the municipality to do his work properly. It is most unlikely that an auditor is under no duty to do his work honestly and with skill and care and it seems to me that his relationship with the municipality is so much closer than to the Governor in Council or to the Minister, that it is a proper inference that his duty is to the municipality.

In support of an opposite conclusion three contentions were urged, all of which are to be found in the powerful judgment of Smith J. The first is that an auditor is appointed by the Governor in Council and is not engaged by the municipality. I have already indicated why I do not attach weight to this consideration and I merely add by way of analogy that an auditor of a public company appointed at an annual general meeting (Companies Act 1958 Vict. s. 141 (1)) would seem to be in exactly the same position as an auditor appointed by the Governor in Council (s. 141 (2)).

The second contention which I regard as one of considerable weight is that Pt. XVI is concerned with the investigation of the accounts of authorities of the State by public officers performing statutory duties. This seems clearly to be so in the case of inspectors of municipal accounts. It may well be so in the case of special auditors whose duty it is to report to the Minister. It may naturally be said therefore that annual auditors are to be regarded as in the same position. I have reached a conclusion, however, that there is a clear distinction to be drawn between annual auditors and both inspectors of municipal accounts and special auditors, if it be the case that the only duty of the latter is to the Minister or Governor in Council.

The Act creates no relationship between the inspector of municipal accounts and the municipalities whose accounts are investigated. An inspector is clearly enough a public official exercising supervision on behalf of the central government over municipal governments. The special auditor seems to me, however, to be in an intermediate position. Section 497 requires such an auditor to report to the Minister and any certificate of misapplication of funds has to be confirmed or disallowed by the Governor in Council. There is no provision for direct communication between a special auditor and the municipality and it may be that the only duty of the special auditor is to the Governor in Council or the Minister. On the other hand, however, there are elaborate provisions to which I have referred which show clearly that in the case of the annual auditor, the municipality has to be made aware of whether the auditor finds its accounts correct or disapproves of them and if so, the grounds of his disapproval, and there is no express requirement that such an auditor should report either to the Governor in Council or to the Minister. As I read Pt. XVI all provisions relating to the annual audit could operate without any such report, but it does appear from s. 480 (2) that it is expected that if such an auditor disallows any part of the accounts, the Minister will be made aware of this and the reasons therefor so that he may, if he wishes, exercise his power to direct that the reasons for disallowance should not be published. If it be that the provisions of the Act relating to special audits indicate that the whole duty of a special auditor is to the Governor in Council or the Minister, a like process of reasoning based upon the obligations which the Act imposes upon an annual auditor would, it seems to me, lead to the conclusion that the duty of such an auditor is to the municipality and not to the Governor in Council or the Minister. The continuous auditor would appear to me to be in the same situation as the annual auditor.

The third contention against the conclusion I have expressed is that the auditor's function in allowing or disallowing the accounts is quasi-judicial so that no action can be maintained for mere failure to use care and skill in the performance of functions of that character: Partridge v. General Council of Medical Education and Registration of the United Kingdom [1] , Everett v. Griffiths [2] . In support of this, reliance was placed upon four matters. The first is the matter of history already referred to that there was once an appeal from the auditor's decisions to a court of general sessions. The second depends upon the provisions which authorize the attendance of interested persons at the audit, which give them the power to object and then which provide that when the accounts have been allowed, examined and settled, they shall be final in regard to all persons whomsoever except when there is a subsequent special audit (s. 479). The third matter is the wide power of inquisition given by s. 490 to the annual auditor in common with other auditors and inspectors of accounts. The fourth matter is that when a certificate of a special auditor has been confirmed by the Governor in Council, the Act gives that certificate the quality of conclusive evidence in courts of law and it is said the duties of an annual auditor are of the same character as those of a special auditor. These matters taken together are of considerable weight but I am not satisfied that the duty of an annual auditor goes beyond the audit of accounts and their allowance or disallowance. The function of a municipal auditor making an annual audit seems to me to approximate to that of a company auditor making an annual audit. Taking each of the foregoing matters in turn, I would observe that the position which existed prior to 1891 is not now a safe guide because the amendments of 1891 made it clear that the audit is to be the examination of accounts by a person of special skill. The fact that there was originally an appeal to general sessions at a time when the provisions as to special auditors were not as they are now, seems to me to throw little light upon the function of annual auditors at the present time. As to the second and third matters, it is true that the Act does confer upon annual auditors powers and duties beyond those of the ordinary company auditor but this is explicable on the ground that the auditor is appointed to investigate the books and accounts of a governmental authority. So far as s. 479 is concerned, I should say that I have no confidence that I understand what is meant by the provision that the accounts when allowed and signed "shall be final in regard to all persons whomsoever", but the important thing for present purposes is that what gives the accounts that degree of finality is not the certificate of the auditor but their allowance by the council after its examination of their correctness. As to the fourth matter, for reasons which I have already given, I do not think it possible to draw any inference as to the function of an annual auditor from the function of a special auditor. Furthermore, it is the confirmation by the Governor in Council of a special auditor's certificate that gives it the character of conclusive evidence.

In the course of his judgment, Smith J. considered a number of authorities but all I think it necessary to say is that because I do not attach weight to the fact that an auditor is appointed by the Governor in Council and not by the municipality itself, I find some support for the view that I have taken in Tumbarumba Shire Council v. S. [1] although the claim there seems to have been based on contract rather than tort. I agree, however, with Smith J. that no decided case governs the decision of this case.

In the course of the argument which was addressed to us, reference was made to the number of cases where a duty of care has been inferred from a particular relationship. It does not seem to me to be necessary to examine these cases because of my conclusion, based upon the provisions of Pt. XVI, that the relationship of municipality and auditor for the municipality imports a duty owed by the auditor to the municipality.

I have had the advantage of reading the judgments of my brothers Fullagar and Menzies. I need say no more than that I agree that this appeal should be allowed. The respondent, having entered upon the duties of auditor for the municipality, had, I consider, a duty to the municipality to conduct the audit with due skill and care.