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The Prospects of a Successful Claim Against Auditors in Fraud

In the vast majority of professional liability cases involving erroneous financial statements, auditors are accused of negligence for failing to detect and report on accounting inaccuracies. Except where the plaintiff is the audited company, the allegation is not that the auditors owe the plaintiff a duty of care to carry out the audit properly, but rather that they owe a duty to deliver an auditor’s report that can be reasonably relied upon.The action lies in negligent misrepresentation.

In a series of decisions culminating in Hercules Managements Ltd. et al v. Ernst & Young et al (1997), 146 D.L.R. (4th) 577 (S.C.C.), the courts have barred many claims against auditors based on public policy concerns over indeterminate liability.

Actions in Canada against auditors for deceit, also called fraudulent misrepresentation, are extremely rare.No doubt given recent high profile cases in the United States coupled with the restricted availability of negligent misrepresentation actions in Canada, plaintiffs’ counsel will increasingly turn their minds to the option of an action in deceit.

The purpose of this article is to consider in the circumstances in which auditors may be subject to liability in deceit when a claim of negligent misrepresentation may be unavailable.

For a full copy of the article, click here.

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