In what lawyers say is an important decision, an English commercial court has decided that a claim can be made against auditors who failed to spot a letter of credit (L/C) fraud, even if the fraud was perpetrated with the aim of benefiting the company in question.

The court held that the liquidator who is administrating the now collapsed company could continue with its claim against the auditors. The court said this was because the fraud was "the very thing" auditors were under a duty to identify.

The case

Stone & Rolls Ltd was involved in L/C fraud against banks. The owner-manager colluded with a third party to create artificial commodity sales and generate false documents for the purpose of obtaining funds under L/Cs issued by a bank for the company's benefit.

The money received by the company was then passed on to the third party or to companies connected with the third party.

Leave to appeal

The company and its owner-manager were found liable. Following this the company was placed into liquidation. The liquidators then brought an action in negligence against the company's auditors, Moore Stephens, claiming they should have been aware of the fraud and "blown the whistle" bringing the fraud to an end.

The defendant auditors have been granted permission to appeal the commercial court's judgment.

Fraud rewarded

Lawyers say that if this judgement is not overturned by any appeal, it has serious implications for the auditors concerned and others who may be faced with similar claims.

"The effect is to allow the company to pursue the claim against its auditors even though it is based on its own wrong," says a statement issued by UK law firm Walker Morris.

Lawyers at another UK law firm, CMS Cameron McKenna, say that by allowing the company to continue to claim damages from the auditors, "the appearance is that the company's fraud has been rewarded."

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.