Auditor liable for increase in liquidation deficit following audit which failed to disclose fraud

D and G formed business, L Inc., and manipulated its financial records. L Inc. continued to raise capital and reinvested it in unprofitable enterprises. Auditor’s report for 1997 did not disclose fraud. L Inc. filed for insolvency protection and went into receivership. L Inc. brought successful action in tort and contract against auditor. Court of Appeal dismissed appeal and cross-appeal. Auditor appealed. Appeal allowed in part; damages reduced. Auditor should not be liable for L Inc.’s increase in liquidation deficit which followed auditor’s provision of negligent services in relation to solicitation of investment. As L Inc.’s losses did not flow from failure to solicit investment, recovery should be denied for increase in L Inc.’s liquidation deficit beginning in fall of 1997. Auditor should be liable for increase in L Inc.’s liquidation deficit which followed statutory audit. Shareholders were unable to discharge their function of supervising management and safeguarding interests of corporation by reason of auditor’s negligence. As consequence, L Inc.’s corporate life was artificially prolonged, resulting in deterioration of its finances. Recovery should be allowed for increase in L Inc.’s liquidation deficit which followed 1997 audit.

Deloitte & Touche v. Livent Inc. (Receiver of) (2017), 2017 CarswellOnt 20138, 2017 CarswellOnt 20139, 2017 SCC 63, 2017 CSC 63, McLachlin C.J.C., Karakatsanis J., Wagner J., Gascon J., Côté J., Brown J., and Rowe J. (S.C.C.); reversed (2016), 2016 CarswellOnt 122, 2016 ONCA 11, G.R. Strathy C.J.O., R.A. Blair J.A., and P. Lauwers J.A. (Ont. C.A.).