Gaelic Inns v Patrick Lee: Auditor Negligence in Failing to Detect Employee Fraud
In Gaelic Inns Pte Ltd v Patrick Lee PAC, the High Court of Singapore heard a negligence claim by Gaelic Inns Pte Ltd (GIPL) against Patrick Lee PAC, its auditor, for failing to detect cash misappropriations by GIPL's former group finance manager, Denise Ang, during audits from 2002 to 2004. GIPL alleged that the defendant's negligence enabled Denise to misappropriate funds. Justice Belinda Ang Saw Ean allowed the plaintiff's claim, finding the defendant liable for losses incurred due to a breach of their duty of care. The court awarded GIPL $775,266.02 with interest and costs.
1. Case Overview
1.1 Court
High Court1.2 Outcome
Judgment for Plaintiff
1.3 Case Type
Civil
1.4 Judgment Type
Grounds of Decision
1.5 Jurisdiction
Singapore
1.6 Description
Gaelic Inns sued Patrick Lee PAC for negligence in failing to detect employee fraud. The court found the auditor liable for losses due to a breach of duty of care.
1.7 Decision Date
2. Parties and Outcomes
| Party Name | Role | Type | Outcome | Outcome Type | Counsels |
|---|---|---|---|---|---|
| Gaelic Inns Pte Ltd | Plaintiff | Corporation | Judgment for Plaintiff | Won | Philip Fong, Navin Joseph Lobo, Tan Ai Lin |
| Patrick Lee PAC | Defendant | Corporation | Claim Dismissed | Lost | Cecilia Lee Hendricks, Russel Low |
3. Judges
| Judge Name | Title | Delivered Judgment |
|---|---|---|
| Belinda Ang Saw Ean | Judge | Yes |
4. Counsels
| Counsel Name | Organization |
|---|---|
| Philip Fong | Harry Elias Partnership |
| Navin Joseph Lobo | Harry Elias Partnership |
| Tan Ai Lin | Harry Elias Partnership |
| Cecilia Lee Hendricks | Kelvin Chia Partnership |
| Russel Low | Kelvin Chia Partnership |
4. Facts
- Denise Ang, the plaintiff's former group finance manager, misappropriated funds.
- The defendant, Patrick Lee PAC, was the auditor of Gaelic Inns Pte Ltd.
- The misappropriation occurred over three financial years (2001-2003) and beyond.
- The auditor failed to detect the cash misappropriations during the audits.
- Maggie Seah, the payroll and administration manager, alerted the plaintiff to Denise's misdeeds.
- The amount stolen was allegedly $1,006,115.19.
- The auditor was hindered in performing duties due to lack of information.
5. Formal Citations
- Gaelic Inns Pte Ltd v Patrick Lee PAC, Suit 531/2005, [2007] SGHC 13
6. Timeline
| Date | Event |
|---|---|
| Financial year ending for 2001 | |
| Denise passed false journal entries to reduce sales figure by $71,332.37 | |
| Financial year ending for 2002 | |
| Start date of misappropriation of funds by Denise | |
| Financial year ending for 2003 | |
| Maggie Seah raised the alarm about Denise's misdeeds | |
| Defendant ceased to be the statutory auditor for the plaintiff | |
| Plaintiff filed further and better particulars | |
| Oral judgment delivered | |
| Decision date |
7. Legal Issues
- Duty of Care
- Outcome: The court found that the auditor owed the company a duty of care to detect fraud and breached that duty.
- Category: Substantive
- Sub-Issues:
- Scope of auditor's duty of care
- Breach of duty of care
- Related Cases:
- [1990] 2 AC 605
- Negligence
- Outcome: The court found the auditor negligent in failing to detect the employee's cash misappropriations.
- Category: Substantive
- Sub-Issues:
- Failure to detect fraud
- Failure to exercise professional skill
- Contributory Negligence
- Outcome: The court did not find the company contributorily negligent for the losses suffered in 2004 due to management changes.
- Category: Substantive
8. Remedies Sought
- Monetary Damages
9. Cause of Actions
- Negligence
10. Practice Areas
- Commercial Litigation
- Auditor Negligence
11. Industries
- Hospitality
12. Cited Cases
| Case Name | Court | Affirmed | Citation | Jurisdiction | Significance |
|---|---|---|---|---|---|
| BCCI v Price Waterhouse | N/A | Yes | [1999] BCC351 | N/A | Illustrated the skill of the auditor in looking at the company’s accounts and the underlying information on which they are or should be based and telling the shareholders whether the accounts give a true and fair view of the company’s financial position. |
| JSI Shipping (S) Pte Ltd v Messrs Teofoongwonglcloong | High Court | Yes | [2006] SGHC 223 | Singapore | Generally, an auditor who adheres to the accounting standards of the day to convey a true and fair view of the financial statements has a better chance of defending criticisms in the conduct of the audit as compared to an auditor who departs from them. |
| Pacific Acceptance Corporation Ltd v Forsyth | N/A | Yes | [1970] 92 WN (NSW) 29 | NSW | When the conduct of an auditor is in question in legal proceedings it is not the province of the auditing profession itself to determine what is the legal duty of auditors or to determine what reasonable skill and care requires to be done in a particular case. |
| Caparo Industries plc v Dickman | N/A | Yes | [1990] 2 AC 605 | N/A | It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless. |
| Sutherland Shire Council v Heyman | N/A | Yes | (1985) 60 ALR 1 | N/A | The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it. |
| South Australia Asset Management Corp v York Montague | N/A | Yes | [1997] AC 191 | N/A | A duty of care such as the valuer [and similarly an auditor] owes does not, however, exist in the abstract. A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty owed to him and that it was a duty in respect of the kind of loss which he has suffered. |
| Sasea Finance Ltd (in liquidation) v KPMG | N/A | Yes | [2000] 1 All ER 676 | N/A | If the auditors discover that a senior employee of a company has been defrauding that company on a grand scale, and is in a position to go on doing so, then it will normally be the duty of the auditors to report what has been discovered to the management of the company at once. |
| Bell v Peter Browne & Co | N/A | Yes | [1990] 2 QB 495 | N/A | A cause of action based on negligence does not accrue until damage is suffered. |
| Moore v Ferrier | N/A | Yes | [1988] 1 WLR 267 | N/A | It is a question of fact in each case whether actual damage has been established. |
| Knapp v Ecclesiastical Insurance | N/A | Yes | [1998] PNLR 172 | N/A | It is a question of fact in each case whether actual damage has been established. |
| Subramaniam v PP | N/A | Yes | [1956] 1 WLR 965 | N/A | Statements in mitigation plea was allowed to be put in evidence solely to prove her state of mind and not to prove her debts. |
13. Applicable Rules
| Rule Name |
|---|
| No applicable rules |
14. Applicable Statutes
| Statute Name | Jurisdiction |
|---|---|
| Penal Code (Cap.224 1985 Rev Ed) s 408 | Singapore |
| Evidence Act (Cap 97, 1997 Rev Ed) s 45A | Singapore |
15. Key Terms and Keywords
15.1 Key Terms
- Auditor
- Negligence
- Misappropriation
- Duty of Care
- Cash Sales
- Unlodged Cash Deposits
- Teeming and Lading
- Bank Reconciliation
- Audit
- Financial Statements
15.2 Keywords
- auditor negligence
- employee fraud
- duty of care
- cash misappropriation
- Gaelic Inns
- Patrick Lee PAC
16. Subjects
- Auditor Liability
- Negligence
- Fraud Detection
- Financial Auditing
17. Areas of Law
- Tort
- Negligence
- Auditing