Facts: The auditors of Cambridge Credit overstated the value of the assets, breaching their contractual duty. If the assets had been properly valued, the company would have been put into receivership in 1971. Instead the company traded until 1974. If the company had gone into receivership in 1971, losses would have totalled $10 million. Instead losses were the order of $155 million. Cambridge Credit claimed for $145 M.
Held: The “but for” test would have been satisfied (but for the auditor’s breach of duty of reasonable care, the loss suffered by Cambridge Credit would not have occurred). However, the majority in NSW Court of Appeal rejected the claim as they considered loss suffered by Cambridge Credit to have been caused by other events eg the collapse of real estate market which Cambridge Credit had invested in. Per McHugh JA, as a matter of “common sense”, the existence of a company could not be the cause of trading losses. External economic factors broke the chain of causation between the auditor’s negligence and Cambridge Credit’s losses.
Question 1: Was the ‘but for’ test satisfied?
Answer: Yes, the ‘but for’ test was satisfied. But for the auditor’s breach of duty of reasonable care, the loss suffered by Cambridge Credit would not have occurred. However, due to “common sense”, it was not the cause of the losses.
Question 2: If the Civil Liability Act had been in force, would it have applied?
Answer: Yes, because an auditor is a professional and a contractual duty of care was owed.