CAMBRIDGE CREDIT CORPORATION LTD.

AND ANOR V HUTCHESON AND ORS

[1985]
As extracted from Francis Malane. 2005. The Standard of Care and
Responsibility Required of Auditors in the Detection of Fraudulent or Illegal
Activity: The AWA Case. PhD Thesis.

Although it was not sustained on appeal, Rogers J found that the judgment
demonstrated that '...the financial consequences of the auditor's negligence
may not emerge for some years...' (1995 AWA Appeal judgment, p.695) and
that when they do the consequences might far exceed any amount
contemplated at the time of the negligent act. 'This makes the task of insuring
against loss one of immense difficulty for the auditor, and for the underwriter'
(1995 AWA Appeal judgment, p.695). He posed the question as to how the
accountant could adequately insure, when the amount of possible liability was
so speculative.

The Cambridge Credit case was significant primarily for the large amount
awarded against the auditors. The AUD $145 million award in 1985 was based
on several counts of negligence and, although overturned on appeal, it created
a major concern for the financial viability of the auditing profession and the
audit insurance industry.

Rogers J found that:

the defendant auditors Hutcheson were negligent in failing to require in
the accounts for the financial year ending 30 June 1971, that provision
be made against the debt owed by Hunter; and

but for the defendants' negligence, the trustee for the debenture
holders of Cambridge would have caused a receiver to be appointed on
or about 30 September 1971, rather than on 30 September 1974, and

the deficiency in the funds of Cambridge in so far as it was greater in
1974 than in 1971, was due to the negligence of the defendants.
This judgment was overturned on Appeal because the plaintiffs had failed to
establish a sufficient causal relationship between the auditors' negligence and
the losses that the corporation had suffered. Litigation continued until 1988
when there was an out of court settlement of $19.5 million.

The AWA Appeal judges noted that courts have had to consider whether, in
cases of tort, the breach of duty of a defendant was a cause of a loss, which
had been identified in the evidence. In Cambridge Credit the court found that
the ultimate test of causation was whether, using common sense, the relevant
act or omission was a cause of the loss. 'It was also said that the 'but for' test
was sufficient in most cases to provide the relevant answer' (1995 AWA Appeal
judgment, p.682).

Rogers J in Cambridge Credit found that, whilst there were a number of
difficulties in assessing the question of the plaintiffs loss, it was, simply stated,
the difference between the amount which would have been realised had the
receiver been appointed in September 1971 rather than in September 1974.
'On any view, the plaintiff established a minimum figure of $145,000,000'
(1995 AWA Appeal judgment, p.682).