Q.

2 Nikkis Case

Two possible aspects that we can presume on Nikkis Case as follows: 1. Liability of auditors to particular shareholders & outsiders 2. Continuous disclosure The most appropriate cases in relation to the first aspect as follows: * Caparo Industries plc v Dickman (1990) * Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) These relevant cases would help us address the main point given in the question, Can Nikki sue the auditors for any loss that she suffers as a result of a fall in the value of her shares?

Caparo Industries plc v Dickman (1990) FACTS: The plaintiffs (Caparo) owned shares in a public company that was audited by the defendant
(Dickman) for the purpose of an annual statutory audit. The plaintiffs then purchase further shares, embarking on a successful takeover bid of the company. They subsequently suffered a substantial loss and sued the auditor in negligence. It was alleged that the shares had been purchased in reliance on the defendants audit, which was negligently prepared and provided a misleading impression of the companys financial condition.( The auditors report did fail to make clear that the company had been operating at a loss)

HELD: In the courts view, the auditor had been carrying out a duty to the company directors and,
while it could have been foreseen that its report would be read by the investors, it was not reasonable to expect the auditor to foresee that the investors would actually rely upon it to for their own investment purpose. In short, the court held that the auditor owed no duty of care in relation to the accuracy of its audit to either members of the general public or existing shareholders who sought to invest in the company. Sufficient proximity between the plaintiffs and defendants did not in this instance exist, principally because the audit was not intended for the use made of it by the plaintiffs. In fact, the audit had been prepared for the purpose of enabling the shareholders as a body to exercise control over the company.

Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) FACTS: Peat Marwick Hungerford (Peats), an auditor, was alleged to have failed to comply with
accounting standards when auditing the financial accounts. Esanda relied on the audited accounts and audit report when lending money to Excel. Esanda sought damages for negligence against Peats and asserted that it would not have entered into the loan transactions but for its reliance on the audited accounts of Excel.

ISSUES: In an action for negligence for pure economic loss is it sufficient to plead that it was
reasonably foreseeable by an auditor that creditors and financiers of a corporation might rely on the audited accounts of the company in entering into financial transactions involving that corporation? Does an auditor owe a duty of care to every member of the class comprising creditors and financiers of the corporation, where financial accounts have audited?

FINDING: In actions for negligence claiming economic loss is suffered in consequence of a statement
made or advice given by a defendant the possibility that a member of class might rely on the statement or advice and thereby suffer loss has never been held sufficient to support recovery. Esanda had not proven that Peats owed a duty of care to it to audit the financial accounts with due care and skill. For Nikki to be successful in her action against the auditors, firstly she needs to consider the Caparo three-stage test which comprises: Foreseeable harm to the claimant; Proximity or neighbourhood between the claimant and defendant; and That it is fair, just and reasonable to impose a duty of care in this situation.

Also, She can quote the test that is proposed by Brennan CJ in the Esanda case. The Chief Justice of Australia (Brennan) held that an auditor will owe a duty of care to a third party if it is alleged and can be proved that:
The auditor knew or ought reasonably to have known that the auditors report on the financial statements would be communicated to the third party, either individually or as a member of an identified class; and The audited financial statements would be so communicated for a purpose that would be very likely to lead the third party to enter into a transaction of the kind that the third party did enter into; and It would be very likely that the third party would enter into such a transaction in reliance on the audited financial statements and thereby risk the incurring of economic loss. If Nikki cannot satisfy those proposed tests, then she would not be successful in the action for negligence of the auditors. Consequently, she may need to redirect her way to succeed in the action based on the second aspect of this case which is Continuous Disclosure.