Livent – Ontario Court of Appeal finds that a company can hold its auditors liable for failure to detect the company’s own fraud effected through its senior management

Deloitte was unsuccessful in arguing that it was not liable to the receiver for a public company (Livent), for failure to detect the fraudulent misstatement of Livent’s financial statements, because it was the most senior management of Livent who were proactively engaged in the fraud, so that effectively Livent was suing Deloitte for Livent’s own fraud. Blair JA quoted with approval a statement by Lord Mance that “[i]t would lame the very concept of an audit” if the auditor could “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.”

Hopefully this case is irrelevant to tax practice. It might arguably be relevant if, for example, you provided a withholding tax opinion as a condition to a financing based on factual representations of management which you should have realized were false, and the receiver subsequently sues you for the company’s (grossed-up) Part XIII tax liability.

Neal Armstrong. Summaries of Livent Inc. v. Deloitte & Touche (2016), 128 OR (3d) 225 (Ont CA) under General Concepts – Negligence, and General Concepts – Illegality.