Barings Plc & Anor v Coopers & Lybrand (a firm)& Ors

An auditor conducting a substantive audit must obtain reasonable assurance that the financial statements are complete and accurate. The procedures required depend on the risks reasonably apparent at the time. An auditor need not devise a test aimed solely at detecting a particular concealed fraud where the assessed risk is low and ordinary procedures provide reasonable assurance.

The auditor must nevertheless investigate material year-end anomalies and unusual financial relationships. Management explanations require corroboration where applicable auditing standards or the circumstances demand it. An audit client's subsequent management failures may become the sole operative cause of continuing loss where their accumulated effect eclipses the auditor's negligence. Before that point, damages may be reduced substantially for contributory negligence attributable to the company, including failures by those to whom its board delegated management functions.

The Barings group collapsed after the general manager of Baring Futures (Singapore) Pte Ltd (“BFS”) concealed unauthorised derivatives trading through account 88888. BFS claimed that Deloitte & Touche (Singapore), its auditors for 1992 and 1993, negligently failed to discover the trading. Claims against two Coopers & Lybrand firms had been settled, and the parent companies' claims against the auditors had previously been struck out.

The court determined Phase 1 of the litigation. The issues included the standard and scope of the audits, causation, the auditors' counterclaims based on representations by BFS personnel, contributory negligence, contribution claims against other Barings companies, principles governing damages and statutory relief for auditors.

The central questions were whether the auditors should have discovered the fraud from a year-end payment and a margin imbalance, and how far the resulting losses remained attributable to their negligence given the extensive management failures within Barings.

1. The claim succeeded in part. The auditors were negligent in two respects. In 1992 they accepted without adequate investigation the treatment of ¥670 million, received after the year end, as received on the final day of the accounting period. Proper enquiry would have revealed its credit to account 88888 and the concealed trading. In 1993 they failed to investigate the anomalous excess of margin deposited with SIMEX over margin held for customers. A properly corroborated investigation would likewise have exposed unauthorised house trading: paras [643]–[652], [668]–[692].

2. The auditors were not negligent in omitting a reconciliation of all open positions, permitting BFS to administer the confirmation process, or failing to confirm the nil balance on account 88888 in 1993. The audit was reasonably assessed as normal or low risk. Verification of the balances against exchange records and customer confirmations provided reasonable assurance unless balances had been fraudulently manipulated. The auditors were not required to devise a procedure directed solely at that particular concealed fraud: paras [543]–[588].

3. The counterclaim based on Leeson's deceit failed. BFS was vicariously liable for representations made in the course of his employment. However, the auditors had a pre-existing duty to detect the very concealment on which their counterclaim depended. Applying the reasoning in Empress Car and Reeves, their negligent failure to detect it, rather than the deceit, was the effective cause of their exposure to suit. The counterclaim based on Mr Jones's negligent representation letters merely duplicated the comparative-fault analysis: paras [698]–[780].

4. The auditors' negligence was a factual cause of the subsequent trading losses, and those losses were within the scope of their duty. Nevertheless, by 30 April 1994 the accumulated management failures had eclipsed the auditors' negligence. Unreconciled Dollar Funding, the unexplained K2/P4 balance, the persistent overdraft, the margin anomaly, the absence of segregation and supervision, and extraordinary reported profits demanded an investigation which would have uncovered the fraud. BFS' fault was thereafter the sole operative cause: paras [816]–[879].

5. BFS' damages were reduced for contributory negligence by 50% from 2 November 1992 to mid-August 1993, 60% from then to the end of December 1993, and 80% from then to the end of April 1994. The board's delegated management failures were attributable to BFS. The contribution claims against Plc, BSL and BSJ were dismissed: paras [897]–[1079].

6. Damages were to be calculated by reference to the £25,138,505 loss on 2 May 1994, subject to the stated deductions and detailed assessment. The auditors were entitled to limited relief under section 391(1) of the Singapore Companies Act, treated as equivalent to section 727 of the Companies Act 1985: paras [1080]–[1148].

• High Court, earlier strike-out proceedings: the claims by Barings Plc and BSL against Deloitte & Touche were struck out. Permission to appeal was granted, but the appeal had not been pursued pending this trial: paras [17]–[18].
• High Court, preliminary issue: the court held that Mr Jones had not acted with reckless fraud when signing the audit representation letters, so the auditors' asserted complete defence failed: paras [19]–[21].
• High Court, present Phase 1 judgment: BFS established two instances of audit negligence, subject to causation limits and substantial reductions for contributory negligence.