Accounting Malpractice and the Auditor’s Responsibility to Detect Fraud


Ralph Summerford
President, Forensic Strategic Solutions

In the case of Livent, Inc. v. Deloitte & Touche the Ontario Court of Appeal upheld a 2014 decision ordering Deloitte & Touche (Deloitte) pay $118 million in damages to a theater company (Livent, Inc.) for which Deloitte performed auditing services. Why was Deloitte held accountable for such a large sum?

It turns out that the owners of Livent, Inc. had been cooking the books for years, while the auditors at Deloitte seemingly looked the other way. Deloitte detected irregularities in the reporting of Livent’s profit, but did not report them correctly and instead took management’s explanation for the irregularity — this was a mistake.

After the $118-million judgement, Deloitte’s position was that Livent’s recovery of damages should be barred by the defense of illegality or reduced because of contributory fault for their executives’ actions. In addition, Deloitte asserted that because Livent’s own executives perpetrated the fraud, they had no right to sue. The judge disagreed, stating that it would create a dangerous precedent that would undermine the fraud system if auditors were not held accountable for their actions.

The takeaways? According to the court, auditors have a legal responsibility to drill down whenever there is something that looks at all suspicious or unusual. Taking management at their word will not protect auditors from legal exposure — they must instead gather corroborating evidence and perform their auditing responsibilities. The court further concluded that hiding behind legal considerations whenever there is a fraud involving company management is not an option.

I am thrilled to discuss cases just like this one and more at the upcoming 29th Annual ACFE Global Fraud Conference. It’s hard to believe that this will be my sixteenth time speaking to this impressive group, and I look forward to sharing some valuable insights into fraud and accounting malpractice.

My session will be focused on exploring current trends into claims against accountants for alleged malpractice where a fraud scheme is involved. I plan to do a deep dive into current legal cases where third parties attempt to recover losses from accountants’ alleged failure to detect a fraud scheme. I will examine what has been alleged against the auditors, help clarify where they may have failed or done wrong and address their responsibility for detecting fraud. In fact, one of the changes that the Public Company Accounting Oversight Board (PCAOB) recently issued to the audit report clearly defines the auditors’ responsibilities for fraud, something that I have pushing for many years. 

A big case decided this year that I am also anxious to share is the Colonial Bank v. PwC ruling. I hope to see you there! Visit today to register.