I was a bit surprised by a recent Ontario Court of Appeal decision that upheld the 2014 decision against the accounting firm of Deloitte and Touche. Basically, the courts found them liable for auditing Livent Inc (Garth Drabinsky and company) and giving it an unqualified “clean audit” statement over several years despite the fact that Drabinsky and others involved were well-known for being creative with their financing and accounting. After Drabinsky sold off the business, it collapsed because it was a giant fraud.

Until these cases, there was a Supreme Court case (Hercules Managements Ltd. v. Ernst & Young) precedent that has generally been interpreted as saying “if a company goes belly up, even for fraud, you can’t sue the auditors for missing it”. Given this precedent, which has been binding for some time (1997), Deloitte might be surprised too, and chances are that an appeal will be launched to take it the Supreme Court — and with an $118M settlement against it, an appeal could be worthwhile.

Appeal court Justice Robert Blair ruled Friday that the original trial judge was correct in concluding Deloitte was negligent in its work on the audit of Livent’s 1997 year-end financial statements, as well as the interim statements for the second and third quarters of 1997.

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