Auditors Liable for Failing to Catch Livent Fraudulent Activity

Peter Cronyn
Peter Cronyn (photo provided)

By Peter Cronyn

Entertainment corporation Livent Inc. has successfully sued its auditors for failing to detect the fraudulent activities of its senior management.

The Ontario Court of Appeal awarded damages of $85 million on the basis that a more careful investigation would have revealed the fraudulent activity much earlier. One of the principle arguments of the auditors was that they should not be held liable to the company itself for failing to reveal its own fraud, but this was rejected.

The court found Livent management had a history of aggressive and questionable accounting practices and they had also misled the auditors prior to 1997.

The decision greatly expands the potential liability of auditors, and has significant implications for both the accounting industry and the business community in general.