Canada: The Increasing Scope Of Auditors' Negligence: "Livent Inc. v. Deloitte & Touche LLP"

In a decision with far-reaching implications for the accounting industry, on April 4, 2014, Deloitte & Touche was found liable for $85 million for its negligent audits of Livent Entertainment of Canada Inc. in 1996 and 1997.1

Livent was founded as an entertainment company intended to be publicly traded on the North American markets. It raised capital through a Canadian IPO in May 1993, an equity issue in the USA in May 1995, and various other private and public debt and equity issues over the next three years, in part based on the unqualified audit opinions of Deloitte that Livent's financial statements presented "fairly, in all material respects, the financial position of the accordance with generally accepted accounting principles in Canada."

That image of financial health was false. The 1998 restatement of Livent's financial statements for 1996 and 1997 resulted in a significant downward adjustment of reported income and share value fell from USD $6.75 to $0.28 per share. The company's downfall resulted in multiple judicial and quasi-judicial rulings over the next decade including criminal convictions, cross-border bankruptcy proceedings, hearings before the SEC and OSC, and prosecutions of certain Deloitte partners before the Discipline Committee of the Institute of Chartered Accountants.

Livent, by its Receiver, brought an action for negligence and breach of contract against Deloitte regarding the audit of Livent's financial statements.

Standard of Care

The Court highlighted a significant change in the standard of care to be applied to auditors in the modern era. Deloitte argued that the standard required was that of "a reasonably competent and cautious accountant". The Court held, however, that the standard of care applicable to auditors in 1990s Canada was not as limited as that asserted by Deloitte. It held that the circumstances of a particular case may dictate that more than the minimum standard of a "reasonably component and cautious accountant generally" may be required.

The Conduct of the Audit

At trial the Court found that Deloitte's conduct in the 1996 and 1997 audits fell short of the applicable standard of care. Deloitte's assessment of the engagement risk for the 1996 audit was "greater than normal", which the Court found to be a euphemism for "high risk". In addition, planning memos for 1996 provided a clear mandate to increase the level of professional skepticism on all fronts and it was anticipated that there would be more than normal Engagement Partner involvement as a result. For 1996, it was found that Deloitte did not follow its own planning memos and failed to review projections which represented over 30% of Livent's unamortized production costs at year-end, failed to adequately reconcile projected with historical results, and did not insist on management taking a reserve on preproduction costs in 1996 even though they were taken in 1994 and 1995 when the company's total capitalised preproduction costs were significantly less. In addition, Deloitte did not confirm the portion of receivables payable to a staff union even though it disputed the amount. Instead, it accepted management's representation that there was an amount in surplus which could be recovered from the union and carried forward to off-set payments the company would have to make to the union in the future.

The "Achilles' heel" of Deloitte's defence with respect to the 1997 audit was a letter of intent in respect of a transaction in which Livent sold rights in one of its theatres to an arm's length company for $7.4 million. The letter contained a put in the arm's length company's favour, which allowed it to exit the deal if construction on the theatre had not finished by a certain date. Deloitte objected to including the amount Livent received as income, as it viewed the deal as a contingent agreement, to the point of threatening to disassociate itself from the company. However, after significant pressure from management, Deloitte agreed to recognise the gain. The Court found that Deloitte should have remained firm and severed the relationship and should have disclosed the problems with Livent to both the company's Audit Committee and the regulators. At the very least, the Court held it should not have signed off on the 1997 audit opinion.

It is worth noting that before the Judge wrote the penultimate draft of his Reasons, the recent Court of Appeal decision in CIBC v. Deloitte & Touche, was brought to his attention. In that case, the Court of Appeal held that discipline decisions of the ICAO under the predecessor legislation to the Chartered Accountants Act, 2010 may be admissible in a civil proceeding. Although the Judge's analysis and conclusions were not based on any of the ICAO discipline decisions, he noted that the CIBC v Deloitte & Touche decision would arguably have permitted him to reference some or all of the ICAO discipline decisions against the Deloitte audit partners involved in the Livent audits in determining whether there was a breach of the standard of care. 

The Defences of Corporate identity and ex turpi causa

Deloitte argued that a concerted effort was made to conceal the accounting frauds and irregularities from it, and even if it had been negligent, Livent's losses should not be recoverable because they were caused by its own illegal acts.

Deloitte relied on the "corporate identification doctrine" which provides that the commission of a fraud or other culpable act by the directing mind of a company and which is intended or in fact benefits the company, must ipso facto be attributed to the company and thereby deprive it of any remedy in tort. The Court found that policy reasons dictated that this doctrine should not be applied where the company itself was the aggrieved party and was claiming against a third party auditor.

These policy reasons were discussed and applied in the analysis of Deloitte's other argument that the maxim ex turpi causa non oritur actio ("from a dishonourable cause no action arises") was a bar to the company's recovery. The Court held that this doctrine was applicable only in very limited circumstances and it declined to do so here where innocent shareholders would be unjustifiably denied a remedy and where it would allow the auditor to escape liability for the very fraud it should have detected.


This case is important in arguably increasing the standard of care expected of Canadian auditors, especially in complex or high risk audits. It also confirmed the limited grounds on which an auditor can rely on frauds committed by those within the company as a defence to a claim of professional negligence.


1 Livent Inc. v. Deloitte & Touche LLP, 2014 ONSC 2176.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions