When something upsets the apple cart, the knee jerk reaction is to point the finger of blame. So it was with the judgment handed down by Mr Justice Joseph Azzopardi about chicken producers Valle del Miele trying to sue auditors Deloitte and Touche (as it then was) for the money they lost in the Price Club collapse.

However, even a cursory glance through his 34-page ruling indicates that this case was a first for Malta and one even UK Courts would have struggled with.

Why? Because it is not that easy to determine who the auditors are there to serve. Is their ‘duty of care’ to the company and its shareholders, to the banks that loan companies money, to companies that extend credit?

Can they be held responsible for all the consequences that may arise from the use of their audit? The judge did not think so.

The other question raised by this important case is whether Valle del Miele allowed their exuberance – demand for chicken was soaring because people were shunning beef during the mad cow crisis – to override their business instinct. There is plenty in the testimony to indicate there were warning bells going off – and that not from audit reports alone.

Valle del Miele’s argument is that they would never have extended credit had they not seen the September 2000 audit report which Deloitte and Touche signed off without any qualification.

The supermarket operator declared bankruptcy a few months later. Was it a bolt from the blue?

Price Club’s €6 million debt was far greater than the stock it held, and the court expert said clear cash flow was being used for capital repayments, rather than the capital that should have been put up by shareholders. A June 1999 report by Deloitte and Touche had already reported losses.

So what goes wrong? Are we simply reluctant to believe that a company with a €51 million turnover is too big to fail?

Mr Justice Azzopardi explained that in case law, ‘duty of care’ has been interpreted only to apply for the purpose for which the report has been drawn up by the professional – whether it is doctor or marine surveyor.

This is a point that sits uneasily, even with the British judiciary, and as far back as 1951, Lord Denning wrote: “I think the law would fail to serve the best interests of the community if it should hold that accountants and auditors owe a duty to no one but their client.”

The past 13 years have shown the wisdom of this statement and the collapse of Enron has led to a tightening of accounting standards.

Given today’s more stringent standards, would Deloitte and Touche have been more critical of the finances? Almost certainly. But auditors are not there to look into crystal balls.

They are there to verify the accounts drawn up by or on behalf of the company, not to speculate what might happen if the market were to collapse, shareholders allow their greed to get the better of them, or competitors erode their market share.

So were Deloitte and Touche “negligent” – even though they were not found liable for damages? This is a crucial question for the auditing community and for case law, but many lessons were learned long before.

Creditors are finally becoming aware of the need to look at creditworthiness as well as accounts.

Auditors are more aware of the need to check not only what is in management accounts but what might have been deliberately omitted. Such is the essence of human nature.

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