A negligent audit by an auditing firm (“Deloitte”) of a Canadian public corporation (“Livent”), in which Deloitte failed to discover that senior management was fraudulently misstating the financial statements, was found by the trial judge to have resulted in damages to Livent, so that Deloittte was liable to the receiver-manager for Livent. Deloittte argued inter alia on appeal that as the frauds were committed by Livent itself through its senior management, Livent should be prevented from suing for its own illegal acts. In rejecting this submission, Blair JA noted (at para. 113) that the rationale for such an illegality (or “ex turpi causa”) defence “was to avoid “damage to the integrity of the legal system,” whereas this concern did not arise here as “the actual fraudsters will not profit from their wrongdoing and have not evaded criminal sanction…[n]or will Livent profit from the wrongdoing” (para. 156). He also quoted with approval (at para. 161) the statement of Lord Mance in Stone Rolls, [2009] UKHL 39 (at para. 241) that:
“[i]t would lame the very concept of an audit” if the auditor could, “by reference to the maxim ex turpi causa, defeat a claim for breach of duty in failing to detect managerial fraud at the company’s highest level by attributing to the company the very fraud which the auditor should have detected.”
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