JSI Shipping was the Singapore subsidiary of an American freight-forwarding company and had 2 directors. One was based in Singapore while the other in the United States and was head of JSI’s ultimate holding company.
The Singapore-based director was engaged in a scheme from to siphon off JSI Shipping’s profits for his own benefit and this was allegedly not picked up by the auditors in the audits carried out for FY 1999-2001, but by one of the staff who reported to the US-based director.
JSI Shipping sued the auditors for negligence in failing to pick up the Singapore-based director’s fraud in 3 main areas:
– Failure to verify the Singapore-based director’s entitlement to remuneration.
– Failure to report abuses by the Singapore-based director of his cheque signing limit.
– Failure to properly verify warehouse renovation expenses.
In 2007, the trial judge had found that the auditors had conducted their audit without breach of duty or negligence. JSI Shipping appealed the decision and the Court of Appeal found negligence from the auditors’ failure to obtain independent verification of the Singapore-based director’s entitlement to remuneration.
Nevertheless, the Court of Appeal had determined that JSI Shipping should have been able to catch the fraud but failed to do so due to negligence on their part, and as such, reduced the quantum of damages by 50% for which the auditors were liable.
Breach of laws, rules and regulations, e.g., criminal breach of trust for misappropriating company funds.
Corporate Governance, e.g., weak corporate governance within the company.
Considerations by Auditors:
~ Objectivity applied by auditors in evaluating evidence? For example, could the auditors have performed further work to verify the Singapore-based director’s entitlement to remuneration?
~ Reliance on management representation? For example, could the auditors have insisted on obtaining a formal employment contract, directors’ resolution to specifically approve the Singapore-based director’s remuneration or a confirmation from the US-based director on the Singapore-based director’s remuneration?