1985 (10) TMI 250 - HC - Companies Law

Court rules in favor of auditors, dismissing negligence claim and finding no damages.

Tri-Sure India Ltd Versus AF Ferguson & Co.

The court found in favor of the defendants, ruling that they did not fail in their duties as auditors. The court determined that the defendants acted in ... Audit - Appointment remuneration of auditors, Powers and duties of auditor Issues Involved:1. Whether the defendants failed or neglected to apply their minds to or enquire into or ascertain the true facts as alleged in paras. 5 and 6 of the plaint.2. Whether the correct figures of sales, etc., have been set out in para. 11 of the plaint.3. Whether the publication of the report for the year ended August 31, 1974, caused any set-back to the credibility, prestige or goodwill of the plaintiffs as alleged in para. 12 of the plaint.4. Whether the said alleged manipulations, frauds, etc., could have been discovered by the defendants had they carried out their duties as auditors with reasonable diligence as alleged in para. 19 of the plaint.5. Whether the defendants failed and neglected to carry out their audit in accordance with accepted principles of accounting as alleged in para. 21 of the plaint.6. Whether the plaintiffs have suffered damages as set out in para. 22 of the plaint.7. Whether the defendants are liable to compensate the plaintiffs for the said alleged damages.8. What reliefs, if any.Issue-wise Detailed Analysis:Issue 1: Whether the defendants failed or neglected to apply their minds to or enquire into or ascertain the true facts as alleged in paras. 5 and 6 of the plaint.The court found that the defendants did not fail or neglect to apply their minds or enquire into the true facts. The defendants had carried out their audit work based on the established internal control system, which was functioning smoothly as introduced by the holding company. The plaintiffs' claim that the defendants should have examined the procedure from the beginning to the end in respect of production of goods was unsupported by any authoritative publication. The court concluded that the auditors were justified in relying on the internal control system and the selective verification method.Issue 2: Whether the correct figures of sales, etc., have been set out in para. 11 of the plaint.The court affirmed that the correct figures of sales, gross profit, income tax, surtax, and net profit for the years ending August 31, 1973, and August 31, 1974, were accurately set out in para. 11 of the plaint.Issue 3: Whether the publication of the report for the year ended August 31, 1974, caused any set-back to the credibility, prestige or goodwill of the plaintiffs as alleged in para. 12 of the plaint.The court found no evidence to support the claim that the publication of the report caused any setback to the plaintiffs' credibility, prestige, or goodwill. The plaintiffs failed to provide sufficient evidence to establish any damage to reputation or goodwill. The court noted that the plaintiffs' claim for nominal damages was unsupported by evidence.Issue 4: Whether the said alleged manipulations, frauds, etc., could have been discovered by the defendants had they carried out their duties as auditors with reasonable diligence as alleged in para. 19 of the plaint.The court concluded that the alleged manipulations and frauds could not have been discovered by the defendants even if they had carried out their duties with reasonable diligence. The court noted that the manipulation of accounts was carried out by the plaintiffs' staff in collusion with the managing director, and the internal control system was functioning smoothly. The auditors had no reason to suspect any irregularity based on the information available at the time of the audit.Issue 5: Whether the defendants failed and neglected to carry out their audit in accordance with accepted principles of accounting as alleged in para. 21 of the plaint.The court found that the defendants did not fail or neglect to carry out their audit in accordance with accepted principles of accounting. The court noted that the auditors followed the established internal control system and carried out selective verification. The plaintiffs' claim that the auditors were negligent in not checking the procedure from the beginning to the end in respect of production of goods was unsupported by any authoritative publication.Issue 6: Whether the plaintiffs have suffered damages as set out in para. 22 of the plaint.The court found that the plaintiffs did not suffer any damages as set out in para. 22 of the plaint. The plaintiffs failed to provide sufficient evidence to support their claim for excess income tax, surtax, sales tax, and loss of excise rebate. The court noted that the plaintiffs' claim for loss of reputation, goodwill, and dislocation of business was unsupported by evidence. The court also found that the plaintiffs' settlement with the Income-tax Authorities was not connected to the alleged negligence of the auditors.Issue 7: Whether the defendants are liable to compensate the plaintiffs for the said alleged damages.The court concluded that the issue does not arise as the plaintiffs failed to establish that the defendants were negligent in the discharge of their duties.Issue 8: What reliefs, if any.The court dismissed the suit with costs, finding that the plaintiffs failed to establish any negligence on the part of the defendants and did not suffer any damages as claimed.