Auditors may have a complete defence to negligence claims if they can argue they themselves were deceived by senior management. That is the implication of the recent Barings judgment (Evans Lombe J - 20 March 2002).

Deloitte Touche Tohmatsu (DTT) was the auditor of Barings Futures Singapore (BFS) prior to Barings' collapse. Barings' liquidator has claimed DTT is liable for the losses caused by Nick Leeson. DTT asked the court to decide as a preliminary issue whether, assuming negligence (which issue is still to to be tried), it had a complete defence by reason of a counter-claim, comprising the losses resulting to DTT by reason of their being victims themselves of management deceit, those losses acting to extinguish BFS claims. In short, DTT alleged it had been induced to sign its audit report in reliance on false statements in a letter of representation signed by a director in circumstances which amounted to a deceit. The director, for whom the company was vicariously liable, had caused the loss and since contributory negligence is not available in deceit, this claim trumped that of the negligence claim, thereby providing a complete defence.

The judge found the director had not been deceitful, but otherwise agreed with DTT, although in reaching this view he expressed concern that the effect was the auditor would escape liability completely as a result of the reckless representation letter written by the very management on whose account DTT was appointed to report to the shareholders.

The decision will fuel the governance debate and perhaps encourage a further look at the question of professional liability and whether there is not some "third way" based on proportionate contribution to the loss. In the meantime, underwriters and professionals take note.

Oscar Harrison-Hall is a solicitor at Davies Arnold Cooper