JSI Shipping v Teofoongwonglcloong: Auditor Negligence & Duty of Care in Statutory Audits

JSI Shipping (S) Pte Ltd sued Teofoongwonglcloong (a firm) in the Court of Appeal of the Republic of Singapore on 30 August 2007, alleging breaches of contractual obligations and duty of care in relation to statutory audits for financial years 1999, 2000, and 2001. The primary legal issue was whether the auditors acted negligently in verifying the remuneration of a director, John Peake Riggs, and whether this negligence caused the company's losses. The court found that the auditors breached their duty of care by failing to adequately verify Riggs' remuneration and awarded partial damages, excusing the respondent from full liability under Section 391 of the Companies Act.

1. Case Overview

1.1 Court

Court of Appeal of the Republic of Singapore

1.2 Outcome

Appeal Allowed in Part

1.3 Case Type

Civil

1.4 Judgment Type

Grounds of Decision

1.5 Jurisdiction

Singapore

1.6 Description

JSI Shipping sues Teofoongwonglcloong for auditor negligence. The court finds a breach of duty regarding director's remuneration verification.

1.7 Decision Date

29 August 2007

2. Parties and Outcomes

Party Name	Role	Type	Outcome	Outcome Type	Counsels
JSI Shipping (S) Pte Ltd	Appellant	Corporation	Appeal Allowed in Part	Partial	Loh Yong Kah Alan, Edgar Chin
Teofoongwonglcloong (a firm)	Respondent	Partnership	Appeal Partially Dismissed	Partial	R Chandra Mohan, Celia Sia, Melvin Lum, Khoo Yuh Huey

3. Judges

Judge Name	Title	Delivered Judgment
Chan Sek Keong	Chief Justice	No
Andrew Phang Boon Leong	Justice of the Court of Appeal	No
V K Rajah	Justice of the Court of Appeal	Yes

4. Counsels

Counsel Name	Organization
Loh Yong Kah Alan	Kelvin Chia Partnership
Edgar Chin	Kelvin Chia Partnership
R Chandra Mohan	Rajah & Tann
Celia Sia	Rajah & Tann
Melvin Lum	Rajah & Tann
Khoo Yuh Huey	Rajah & Tann

4. Facts

JSI Shipping engaged Teofoongwonglcloong for statutory audits from 1999-2001.
John Peake Riggs, as Asia Director, had overall control of JSI Shipping's operations.
James Glenn Cullen, based in California, oversaw JSISC, the holding company.
Riggs' remuneration was a significant portion of JSI Shipping's total staff costs.
The auditor failed to obtain Riggs' employment contract or direct confirmation from Cullen.
Riggs misappropriated company funds through personal expenses and fictitious payments.
The auditor relied on Cullen's signature on financial statements without specific verification of Riggs' remuneration.

5. Formal Citations

JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a firm), CA 1/2007, [2007] SGCA 40

6. Timeline

Date	Event
1998-09-26	Appellant incorporated
1999-03-26	Letter of appointment issued to respondent
1999-07-08	Letter of consent issued to respondent
2002-05-01	Cullen received anonymous letter alleging Riggs' misconduct
2002-06-21	Riggs resigned
2002-06-28	Riggs confessed to misappropriations
2002-07-01	NLA engaged to conduct special audit
2007-08-30	Judgment reserved

7. Legal Issues

Auditor's Duty of Care
- Outcome: The court held that the auditor breached its duty of care by failing to adequately verify the director's remuneration.
- Category: Substantive
- Sub-Issues:
  - Failure to obtain sufficient audit evidence
  - Failure to exercise professional skepticism
  - Failure to qualify audit opinion
Causation in Negligence
- Outcome: The court found that the auditor's negligence was an effective cause of the loss related to excessive remuneration but not the other misappropriations.
- Category: Substantive
- Sub-Issues:
  - Effective cause of loss
  - Loss of chance
Relief from Liability under Section 391 Companies Act
- Outcome: The court partially excused the auditor from liability under Section 391, considering the honesty, reasonableness, and fairness of their actions.
- Category: Procedural
- Sub-Issues:
  - Honesty
  - Reasonableness
  - Fairness

8. Remedies Sought

Monetary Damages

9. Cause of Actions

Breach of Contract
Negligence

10. Practice Areas

Commercial Litigation
Auditing
Professional Negligence

11. Industries

Shipping
Accounting

12. Cited Cases

Case Name	Court	Affirmed	Citation	Jurisdiction	Significance
Lloyd Cheyham & Co Ltd v Littlejohn & Co	N/A	No	[1987] BCLC 303	N/A	Cited and applied the same test for auditors as that applied for medical doctors (in Bolam v Friern Hospital Management Committee).
Bolam v Friern Hospital Management Committee	N/A	No	[1957] 1 WLR 582	N/A	Applied the Bolam test for auditors.
JSI Shipping (S) Pte Ltd v Teofoongwonglcloong	N/A	No	[2007] 1 SLR 821	Singapore	Refers to the decision at first instance.
Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency	Court of Appeal	No	[2007] SGCA 37	Singapore	Cited for an exegesis on the duty of care in the context of negligence.
Gaelic Inns Pte Ltd v Patrick Lee PAC	N/A	Yes	[2007] 2 SLR 146	Singapore	Cited regarding adherence to accounting standards and the exercise of sound judgment.
Dairy Containers Ltd v NZI Bank Ltd	N/A	Yes	[1995] 2 NZLR 30	New Zealand	Assimilated the requisite standard of care from contract, statutes/regulations, expert evidence, and auditing standards.
In re Kingston Cotton Mill Company (No. 2)	N/A	Yes	[1896] 2 Ch 279	N/A	Adopted a measured approach to the duties of auditors.
Barings plc v Coopers & Lybrand	N/A	No	[2003] Lloyd’s Rep IR 566	N/A	Cited to reiterate that an auditor is neither a detective, insurer, paragon nor prophet.
Leeds Estate, Building and Investment Company v Shepherd	N/A	Yes	(1887) 36 Ch D 787	N/A	Determined that the auditor's duty is not merely verifying arithmetical accuracy but inquiring into substantial accuracy.
In re London and General Bank (No 2)	N/A	Yes	[1895] 2 Ch 673	N/A	Considered the auditor's true function to be ascertaining and stating the true financial position of the company.
Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd	N/A	Yes	[1958] 1 WLR 45	N/A	Elucidated the function of an auditor, stating that they must come to it with an inquiring mind.
Caparo Industries plc v Dickman	N/A	No	[1989] 1 QB 653	N/A	Cited regarding the considerable skill and judgment auditors must exercise.
Bolitho v City and Hackney Health Authority	N/A	Yes	[1998] AC 232	N/A	Qualified the Bolam test, requiring expert evidence to have a logical basis.
Dr Khoo James v Gunapathy d/o Muniandy	N/A	Yes	[2002] 2 SLR 414	Singapore	Presented a timely addendum to the Bolam test.
Pacific Acceptance Corporation Ltd v Forsyth	N/A	Yes	(1970) 92 WN (NSW) 29	N/A	Stated that it is not the province of the auditing profession itself to determine what is the legal duty of auditors.
Edward Wong Finance Co Ltd v Johnson Stokes & Master	N/A	No	[1984] AC 296	N/A	Cited regarding the court's supervisory responsibility to condemn an unjustifiably lax practice as negligent.
Muhammad Jefrry v PP	N/A	No	[1997] 1 SLR 197	Singapore	Cited regarding the need for a judge to carefully and dispassionately direct his mind to the value, impressiveness and reliability of expert evidence.
Pertamina Energy Trading Limited v Credit Suisse	N/A	No	[2006] 4 SLR 273	Singapore	Cited regarding an appellate court's reluctance to disturb a judge's finding of fact.
Sceptre Resources Ltd v Deloitte Haskins & Sells	N/A	No	(1991) 120 AR 6 (CA, Alta)	N/A	Cited regarding the allowance for differing opinions among auditors.
In re Thomas Gerrard & Son Ltd	N/A	No	[1968] Ch 455	N/A	Cited to acknowledge that the standards of auditing which prevailed more than a century ago have evolved into more exacting ones today.
Qualcast (Wolverhampton) Ltd v Haynes	N/A	No	[1959] AC 743	N/A	Cited to state that precedents are of value only in terms of the general principles which they establish.
Vita Health Laboratories Pte Ltd v Pang Seng Meng	N/A	No	[2004] 4 SLR 162	Singapore	Cited regarding the need for independence of expert accountants.
Deputy Secretary v Das Gupta	N/A	No	[1956] AIR 414	N/A	Cited for the proposition that an auditor was not entitled to simply rely on the representations of management without independent verification.
Sasea Finance Ltd v KPMG	N/A	Yes	[2000] 1 All ER 676	N/A	Cited regarding an auditor’s duty to warn of any irregularity or fraud likely to result in material loss to the company.
Sunny Metal & Engineering Pte Ltd v NgKhim Ming Eric	Court of Appeal	No	[2007] SGCA 36	Singapore	Causation is often a thicket of complex factual, legal and policy issues which give rise to difficulties, primarily in the consistent application of principle to the infinite permutations that may arise.
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd	N/A	No	[1997] AC 254	N/A	There is no single satisfactory theory of causation capable of solving the infinite variety of practical problems confronted by the courts.
Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5)	N/A	Yes	[2002] 2 AC 883	N/A	The court will first apply a simple "but for" test, and then go on to make a value judgment.
South Australia Asset Management Corporation v York Montague Ltd	N/A	No	[1997] AC 191	N/A	A claimant has to prove that he has suffered loss and that the loss falls within the scope of the duty of care.
Asia Hotel Investments Ltd v Starwood Asia Pacific Management Pte Ltd	N/A	Yes	[2005] 1 SLR 661	Singapore	The doctrine of “loss of chance” was comprehensively discussed.
Allied Maples Group Ltd v Simmons & Simmons	N/A	Yes	[1995] 1 WLR 1602	N/A	Established a tripartite framework for analyzing the issue of causation in a situation of loss of chance.
Lee Yeow Wee David, “Proving Causation in a Claim for Loss of Chance in Contract”	N/A	No	(2005) 17 SAcLJ 426	N/A	Cited regarding the need to prove that it would in fact have investigated the matter so as to “put it on track to secure the benefit of that chance”.
Miller v Minister of Pensions	N/A	No	[1947] 2 All ER 372	N/A	The “balance of probabilities” standard requires a balancing of the evidence tendered by both parties.
Ikumene Singapore Pte Ltd v Leong Chee Leng	N/A	No	[1993] 3 SLR 24 (CA)	Singapore	The claimant was denied recovery of damages for losses from the auditors because he “could not say what action he would [have taken] if he had known that the accounts were materially ‘inaccurate’”.
Tokuhon (Pte) Ltd v Seow Kang Hong (No 2)	N/A	No	[2003] 4 SLR 414	Singapore	Alluded to the possibility of granting relief for technical breaches.
Panatron Pte Ltd v Lee Cheow Lee	N/A	No	[2001] 3 SLR 405	Singapore	The respondent has not only failed to satisfy the constitutive elements of fraudulent misrepresentation.
Re D’Jan of London Ltd	N/A	Yes	[1993] BCC 646	N/A	It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably.
Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith	N/A	Yes	(1989) 54 SASR 285	N/A	The provision in section 365 is that the person seeking the benefit of the section must have acted reasonably, there being no limitation as to the field in which he must act reasonably.
Hytech Builders Pte Ltd v Tan Eng Leong	N/A	Yes	[1995] 2 SLR 795	Singapore	A paramount consideration in the exercise of the court’s discretion under s 391 is whether the person who seeks the court’s indulgence has acted honestly and in good faith.
Reeves v Commissioner of Police of the Metropolis	N/A	No	[2000] 1 AC 360	N/A	It would make nonsense of the existence of such a duty if we were to hold that the falsity of the representations which ought to have been detected by the respondent negatived the losses flowing from such breach.
Jones v Livox Quarries LD	N/A	Yes	[1952] 2 QB 608	N/A	A person is guilty of contributory negligence if he ought reasonably to have foreseen that, if he did not act as a reasonable, prudent man, he might be hurt himself; and in his reckonings he must take into account the possibility of others being careless.
PS Marshall and AJ Beltrami, “Contributory negligence: a viable defence for auditors?”	N/A	No	(1990) LMCLQ 416	N/A	It is undoubtedly correct that the defence of contributory negligence must receive a narrow application.
AWA Ltd v Daniels	N/A	Yes	(1992) 7 ACSR 759	N/A	s 1318 of the Australian Corporations Law (Cth) (in pari materia with s 391, save for the requirement of reasonableness) was an appropriate provision for allocation of fault.
PlanAssure PAC v Gaelic Inns Pte Ltd	Court of Appeal	No	[2007] SGCA 41	Singapore	Our review of the facts in this matter and in PlanAssure PAC v Gaelic Inns Pte Ltd [2007] SGCA 41 has caused us some anxiety about the prevailing professional standards of public accountants in Singapore.

13. Applicable Rules

Rule Name
No applicable rules

14. Applicable Statutes

Statute Name	Jurisdiction
Section 391 Companies Act (Cap 50, 1994 Rev Ed)	Singapore
Section 205 Companies Act (Cap 50, 1994 Rev Ed)	Singapore
Section 207 Companies Act (Cap 50, 1994 Rev Ed)	Singapore

15. Key Terms and Keywords

15.1 Key Terms

Statutory Audit
Duty of Care
Professional Scepticism
Management Representation
Scope Limitation
Reasonable Assurance
Material Misstatement
Contributory Negligence
Loss of Chance
Section 391 Companies Act
Remuneration Verification

15.2 Keywords

Auditor
Negligence
Companies Act
Singapore
Shipping
Remuneration
Duty of Care

16. Subjects

Auditor Negligence
Companies Law
Professional Liability

17. Areas of Law

Companies Law
Tort Law
Negligence
Auditing Law