Auditors’ liability for failure to ‘blow whistle’ on fraud

English firm CMS Cameron McKenna has published a case note on Case Stone & Rolls Limited (in liquidation) v. Moore Stephens (a firm) [2007] EWHC 1826 (Comm). It is a decision which considers the rule ex turpi causa non oritur actio in the context of a professional liability claim, in this case to a claim of liability in a professional whose task was to prevent fraud. The rule says no cause of action can be founded on illegality or immorality in the plaintiff.  The case note begins:

‘In an important decision, the [English] Commercial Court considered whether or not a company which had perpetrated a fraud could claim against its auditors for failing to detect and report that fraud.  Even though this involved the company relying on its own fraud, the Court nevertheless held that it could continue with its claim against the auditors.  This was, according to the Court, because the fraud was “the very thing” that the auditors were under a duty to identify, and the “ordinary citizen” would not find anything repugnant in allowing the company to make a recovery in such circumstances.’

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