Leech v Stokes Bros. and Pim

JurisdictionIreland
CourtSupreme Court (Irish Free State)
Judgment Date23 November 1937
Date23 November 1937

Supreme Court.

Leech v. Stokes and Others.
HUNT WALSH LEECH
Plaintiff
and
R. STANLEY STOKES, FRANCIS H. PIM and G. FRANCIS KLINGNER carrying on business in partnership under the style of STOKES BROS. & PIM
Defendants.

Negligence - Breach of duty - Auditors and accountants - Preparation of annual profit and loss account for income tax purposes - Duty of auditors and accountants in preparing such accounts - Whether bound to prepare a balance sheet - No materials available form which a balance sheet could be prepared - Whether entitled to prepare accounts without such materials - Embezzlement by clerk of agency fees collected - Allegation that if accounts had been properly made out such embezzlement would have been detected and further misappropriation prevented - Books not showing any grounds for suspicion of embezzlement - Vouching agency fees - Whether necessary - Liability of auditors and accountants.

Trial of Action.

The plaintiff brought a plenary summons claiming damages for negligence and breach of duty by the defendants as accountants and auditors.

The following statement of facts is taken from the judgment of Hanna J.:—

"The plaintiff, Mr. Hunt Leech, is a well-known solicitor. He has been a member of the profession since the year 1869 and was senior member of the firm of Messrs. Crookshank, Leech and Fetherstonhaugh of Dublin. At the times under consideration in this case he had a partner, Mr. Frank E. Fetherstonhaugh, who was junior partner under a deed of partnership, dated January 2nd, 1928, the partnership commencing as from April 5th, 1927. Prior to that date Mr. Fetherstonhaugh had been a salaried assistant solicitor of the firm. The business of the firm of Crookshank, Leech and Fetherstonhaugh was under the sole control of Mr. Fetherstonhaugh, as Mr. Leech resided in Coleraine, Co. Londonderry, where he practised as a solicitor. He did not take any active part in the Dublin business, and merely received his share of the profits from time to time. The position of cashier and book-keeper of the firm was filled by a clerk named Hill. In addition to the ordinary business of solicitors the firm had a large business as agents for the collection of rents of over forty estates throughout Ireland. The work of receiving the rents and other moneys and giving the receipts for same was the duty of Hill, who, during the years under survey in this case, embezzled many thousands of pounds of clients' money for which, owing to the death of Mr. Fetherstonhaugh, Mr. Leech has become personally responsible. The defendants, Messrs. Stokes Brothers and Pim, are a well-known firm of auditors in Dublin, who were employed, as alleged by the plaintiff, from the year 1928 until 1933 in preparing the annual profit and loss account of the firm. They are charged with negligence and breach of duty as auditors in that during this period of six years by reason of the inefficient auditing by their assistants, Messrs. Deane and McClelland, these defalcations of Hill were not discovered, and that through their negligence he was enabled to continue his course of dishonesty to the extent of embezzling on an average about £500 a year.

The matter has come to light through the death of Mr. Fetherstonhaugh, who died on the 31st March, 1934, following which Mr. Leech formed a new partnership with Mr. Cecil Vanston. The latter, in order to have the accounts of the old partnership squared and the position of the firm ascertained, employed another auditor, Mr. Sedgwick. In the course of these investigations Mr. Sedgwick's assistant, Mr. Naismith, in two days after he had commenced the investigation of the books, discovered the fact that defalcations were being made Until his discovery, which took place in October, 1934, no one had suspected Hill of dishonesty, and he was looked upon as a trustworthy employee.

After the matters had been as fully investigated as was necessary by Mr. Sedgwick and he had reported thereon, this action was commenced in the name of Mr. Leech alone. The personal representatives of Mr. Fetherstonhaugh were not joined as plaintiffs. Mr. Leech, though suing in his own name, admits that he is seeking to recover damages on behalf of the firm, as the last surviving partner. This would seem to be his right under the law, and no question was raised by the defendants on this point. Mr. Leech's claim is that the defendants are liable to make good all Hill's defalcations after the date when they were brought in as auditors.

The particulars of negligence alleged against the defendants in paragraph 15 of the statement of claim are rather vague, and, having regard to the course of the trial, indicate that the plaintiff had in fact very little knowledge of what had actually taken place.

Paragraph 15 is in the following terms:—

'The plaintiff charges that the defendants were guilty of negligence and breach of duty in that they certified the correctness of the accounts without seeing that the books of the Dublin firm were properly kept and proper entries made therein and proper lodgments made with the firm's bankers, and without properly checking the entries with the bank accounts or verifying the correctness of the cash and the bank balance, or making proper examination of the said books or insisting on a proper vouching of receipts and payments, and without examining and comparing all books and accounts of the firm which were the necessary or proper source of information for the due and proper discharge of the duty undertaken by the defendants. The plaintiff relied upon the due discharge of their duty by the defendants and was thereby induced to refrain from investigating on his own behalf the conduct of the partnership business, and the plaintiff charges that, but for such negligence and breach of duty, the frauds of the said Thomas Aloysius Hill would have been discovered and their continuance prevented, and that, as a consequence of such frauds, moneys of the Dublin firm so misappropriated as aforesaid have been lost to the plaintiff, being irrecoverable from the said Thomas Aloysius Hill and ought to be made good by the defendants.'

An important issue in the case really turns on the point raised in the defence as pleaded in paragraph 10, namely, that the defendants were instructed merely to prepare a return of profits of the firm for income tax purposes and that no investigation of the books was necessary or required for that purpose. The terms of the defence in paragraph 10 are as follows:—

'The defendants say that they were instructed by the said Francis Edward Fetherstonhaugh to prepare accounts solely for the purpose of rendering correct returns of the profits of the said firm for income tax purposes and furnishing the same to the Inspector of Taxes, and that the accounts for the years ending on the 5th day of April, 1928, 1929, 1930, 1931, 1932 and 1933, respectively, were prepared by them for the said purposes only and on and in accordance with the instructions in that behalf by the said Francis Edward Fetherstonhaugh on behalf of the Dublin firm. The said Francis Edward Fetherstonhaugh on each occasion of instructing the defendants as aforesaid produced to the defendants certain books relating to the business of the Dublin firm from which he instructed them to extract and segregate such items and figures entered therein as were proper and necessary to be comprised in returns for the purpose of income tax. No bank books or accounts were produced or made available to the defendants and the defendants were not instructed and did not undertake and had no duty to vouch, check or verify the entries in the said books produced to them with the bank books or accounts of the said firm.'

As this defence placed before the plaintiff a new aspect of the case of which he was previously unaware, the plaintiff replied specifically on this point in paragraph 4 of his reply that the negligence of the defendants was in not calling for and examining the necessary books and documents of the firm. This reply was in the following terms:—

'As a further reply, the plaintiff says that, if (which the plaintiff denies) the defendants were only instructed to prepare accounts for the purpose of the assessment of the profits of the Dublin firm to income tax it became and was their duty to call for and examine the books and documents of the firm including the bank books and to verify the entries therein and to furnish an accurate account to the partners severally of the profits and gains of the firm and the deductions to be made therefrom for the purpose of such assessment, and the plaintiff says that all the books and documents of the firm were available for inspection by the defendants if and when called for, and that the defendants were guilty of negligence and breach of duty in omitting to call for and examine the necessary books and documents and verify the entries therein and furnish a proper account to each partner, and that but for such negligence and breach of duty the frauds of the said Thomas Aloysius Hill would have been discovered and their continuance would have been prevented.'

The plaintiff also put in a further reply alleging, as particular negligence and breach of duty, that the defendants, knowing of the existence of the No. 2 Clients' Account to the credit of which all rents received for clients were to be lodged, did not examine or verify same, or verify that the amounts entered for agency fees had been debited to the said rentals, which examination was essential to the discharge of their duty as auditors."

A number of witnesses were examined, including many auditors and accountants as experts as to the practice of the profession, and their evidence is fully dealt with in the subsequent portion of the judgment of Hanna J.

From the decision of Hanna J, the plaintiff appealed to the Supreme Court (1) on the following grounds:—

1. "That the findings of the learned Judge other than those numbered 2...

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