Reported Decision : 55 ACSR 460 New South Wales Court of Appeal Stanilite Pacific Ltd. (In Liq) & Anor. v. Seaton and Ors. [2005] NSWCA 301 CITATION: This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S): 20-24 June 2005 JUDGMENT DATE: 14 September 2005 JUDGMENT OF: Hodgson JA at 1; McColl JA at 176; Bryson JA at 177 DECISION: Short Minutes of Order to be brought in to give effect to reasons. CATCHWORDS: CONTRACT - CORPORATIONS - NEGLIGENCE - Liability of auditors - Construction of accounting standards - Earned value method - Duty of auditor in giving consent to inclusion of auditor's report in a prospectus - Extent of duty - Whether auditor's report constituted misleading conduct - Duty of auditor in audit of accounts - Relationship between compliance with accounting standards and a true and fair view of company's financial position - Causation of loss. Corporations Law 1989 ss.292, 293, 297, 298, 299, 331A, 331AA, 331B, 331D, 995, 999, 1005, 1006, 1032. LEGISLATION CITED: Accounting Standard AASB 1009 Alexander v. Cambridge Credit Corporation Ltd. (1987) 9 NSWLR 310 Alexander v. Perpetual Trustees WA Ltd. (2003) 216 CLR 109 Bank of Credit & Commerce International (Overseas) Ltd. v. Price Waterhouse (Chancery Division, Laddie J, 24/3/98) Bennett v. Minister of Community Welfare (1992) 176 CLR 408 Daniels v. Anderson (1995) 37 NSWLR 438 Demagogue Pty. Ltd. v. Ramensky (1992) 39 FCR 31 Fortuna Seafoods Pty. Ltd. v. The Ship "Eternal Wind" [2005] QSC 004 Galoo Ltd. v. Bright Grahame Murray [1995] 1 AllER 16 Harris Scarfe Ltd. v. Ernst & Young [2005] SASC 113 Heydon v. NRMA Ltd. [2000] NSWCA 374, 51 NSWLR 1 CASES CITED: Janssen-Cylag Pty. Ltd. v. Pfizer Pty. Ltd. (1992) 37 FCR 526 Johnson v. Gore Wood & Co. [2002] 2 AC 1 Johnson v. Gore Wood: cf. Gould v. Vaggelas (1985) 157 CLR 215 Leotta v. Public Transport Commission (NSW) (1976) 50 ALJR 666 Maloney v. Commissioner for Railways (NSW) (1978) 52 ALJR 291 Marks v. GIO Australia Holdings Ltd. (1998) 196 CLR 494 Pilmer v. Duke Group Ltd. [2001] HCA 31, 207 CLR 165 RAIA Insurance Brokers Ltd. v. FAI General Insurance Co. Ltd. (1993) 41 FCR 164 Sew Hoy & Sons Ltd. v. Coopers & Lybrand [1996] 1 NZLR 392 Thompson v. Ice Creameries of Australia Pty. Ltd. (1998) ATPR 41-611 Water Board v. Moustakas (1987) 180 CLR 491 Stanilite Pacific Limited (In liquidation) - first appellant PARTIES: SL Electronics (NSW) Pty. Limited (In liquidation) - 2nd appellant William Henry Seaton and those persons listed in Annexure A to the Notice of Appeal trading as Price Waterhouse - respondents FILE NUMBER(S): CA 40444/04 Mr. F.M. Douglas QC with Ms. C.E. Adamson SC and Ms. E. Raper for appellants COUNSEL: Mr. I.M. Jackman SC with Mr. M.R. Elliott for respondents Deacons, Sydney for appellants SOLICITORS: Minter Ellison, Sydney for respondents LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): ED50055/01 LOWER COURT JUDICIAL OFFICER: Bergin J IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40444/04 ED 50055/01 HODGSON JA McCOLL JA BRYSON JA Wednesday 14 September 2005 STANILITE PACIFIC LTD (IN LIQ) & ANOR. V. SEATON & ORS. t/as PRICEWATERHOUSE Headnote FACTS In 1990 Price Waterhouse (PW) were appointed auditors of the Stanilite Group, which included Stanilite Pacific as the holding company (Pacific) and a number of subsidiaries, including Stanilite Electronics (Electronics). On 11 November 1994 Electronics entered into an agreement with Techin Trade Limited for the supply and installation of telecommunication systems in Russia (the Russian contract) for a price of $37 million. On 3 March 1995, Pacific announced a profit of $4.238 million after tax for the half year to 31 December 1994, which included $6.4 million from the Russian contract. On or about 13 March 1995, a letter from Mr Seaton of PW to the directors of Pacific raised for consideration certain matters, including "aggressive" revenue recognition on the Russian contract of $6.4 million in profit despite the fact no money had been received as at 31 December 1994. At a meeting of the Board of Pacific on 16 March 1995, Mr Seaton tabled an audit report signed by him on behalf of PW, and the accounts for the half-year ended 31 December 1994 were signed by the directors. A subsequent events review to 18 April 1995 by Mr Seaton concluded that no matter had arisen since 31 December 1994 that impacted on accounts or required specific disclosure in a prospectus to be produced for an underwritten rights issue to all shareholders. Pacific received Mr Seaton's consent pursuant to s.1032 of the Corporations Law for the prospectus to include his auditor's report of 16 March 1995. The prospectus was dated 3 May 1995 and contained the financial statements of Pacific and its controlled entities for the half year ended 31 December 1994, the auditor's report dated 16 March 1995, and information about the Russian contract. On 27 June 1995, Electronics entered into an agreement for the supply and installation of telecommunications systems in Argentina for a total amount of $33 million. The unaudited accounts for the year ended 30 June 1995 were tabled at a Board meeting of Pacific on 30 August 1995. These accounts showed an operating profit for Pacific of $6.967 million, of which $5.4 million represented a dividend from Electronics. Using the "recognition of revenue" or "earned value" method of accounting under accounting standard AASB 1009, they also showed an operating profit for Electronics of $10.438 million, which included $11.8 million profit from the Russian contract and $10 million profit from the Argentinean contract. As at 30 June 1995, only $270,000 had been received under the Russian contract, and nothing had been received under the Argentinean contract. PW gave an unqualified audit opinion for the accounts for the year ended 30 June 1995, which contained a note drafted by Mr Seaton concerning the Russian contract. The Board of Pacific approved the accounts, released them to the ASX, and resolved that a dividend of 4 cents per share be paid out of the profits earned for the year ended 30 June 1995. The accounts were then formally signed at a Board meeting on 26 September 1995. Although the total amount of the dividend was $5.452 million, by reason of Pacific's dividend reinvestment plan, a net amount of $1.576 million was paid out. As at 31 December 1995, the consolidated trading results of the Group showed losses of $41.6 million for December and $55.48 million for the year to date. On 22 May 1996, the Board of Pacific resolved to request NAB to appoint a receiver and manager to Pacific and its subsidiaries. A liquidator was appointed on 26 August 1996. Following liquidation, Pacific and Electronics sued PW for damages arising from the consent to include the auditor's report in the May 1995 prospectus, and the audit of the 1994-5 accounts. Bergin J dismissed the proceedings, and Pacific and Electronic appealed. Only certain issues addressed by the primary judge were relevant to the appeal. These included: (1) The meaning of clause .10 of the AASB 1009, a standard of statutory force. Clause .10 requires the method of recognition of revenue (or "earned value" method) to be used under certain conditions, including the condition that the "total revenues to be received can be reliably estimated". The primary judge held that this condition could be satisfied without any need to consider whether it was probable that the revenues would in fact be received, and that the method was appropriately used in this case. (2) The consequential finding of the primary judge was that PW did not breach its duty to or contract with the Group by allowing the inclusion of Mr Seaton's audit opinion in the prospectus, or in giving an unqualified audit opinion on the 1994-5 accounts. HELD (1) The terms "received" and "estimated" in Clause .10 of the AASB justify the interpretation that the condition is satisfied only if the total revenues would probably be received, and the interpretation adopted by Mr Seaton and upheld by the primary judge was incorrect. (2) However, there were substantial considerations favouring the interpretation of clause .10 of AASB 1009 adopted by Mr Seaton, and there was no breach of duty merely on the basis that his interpretation was incorrect. (3) PW had a duty to exercise reasonable skill and care in giving consent having regard to the circumstance that there was no requirement to repeat the audit completed on 16 March 1995 for the half year ended 30 December 1994; and it was not shown that, in the period between 16 March 1995 and 3 May 1995 when consent was given, Mr Seaton and PW were negligent in not coming to a different conclusion regarding the compliance of the accounts with accounting standards. (4) Although liability for misleading conduct in relation to the prospectus consent was possible in the absence of negligence concerning that consent, misleading conduct was not proved. (5) It was not necessary to decide the issue of causation of loss in relation to the consent. (6) It was not shown that AASB 1009, on its true interpretation, did not apply in relation to the Argentinean contract for the purposes of the 1994-5 accounts. (7) In applying AASB 1009 to the Russian contract according to PW's interpretation of the standard, a reasonable auditor, in order that the 1994-5 accounts give a true and fair view, would have required that provision be made against assets included in the accounts, eliminating $11.8 million of profit. Accordingly, it was a breach of PW's duty as auditor to give audit approval for these accounts. (8) It is extremely unlikely Electronics would have declared a dividend, or that NAB would have permitted payment by Pacific, if the $11.8 million had not been included as profit in the accounts. The payment was relevantly caused by PW's breach of duty. (9) Accordingly, the appeal should be allowed and there should be judgment in favour of Pacific for $1.576 million, with provision for interest. ********** IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40444/04 ED 50055/01 HODGSON JA McCOLL JA BRYSON JA Wednesday 14 September 2005 STANILITE PACIFIC LTD (IN LIQ) & ANOR. V. SEATON & ORS. t/as PRICE WATERHOUSE Judgment 1 HODGSON JA: On 12 May 2004, Bergin J gave judgment in proceedings in which the first appellant (Pacific) and the second appellant (Electronics) sued the respondents (Mr. Seaton and PW) for damages for alleged breaches of duties in acting as auditors. The primary judge dismissed the appellants' amended summons, and ordered the appellants to pay the respondents' costs agreed at $2.15 million. The appellants appeal from the whole of that decision. OUTLINE OF CIRCUMSTANCES 2 Pacific was the holding company of the Stanilite Group (the Group), founded in 1977 by two brothers, Robert and John Harriss, who were managing directors at all relevant times. Pacific's shares were listed on the Australian Stock Exchange (ASX) in 1989. It raised capital from time to time for the purpose of making loans to its subsidiaries in the Group, one of which was Electronics. 3 PW became the appellants' auditors in 1990, and continued as such until the appellants were placed into liquidation on 26 August 1996. 4 Prior to 1992, the principal businesses of Electronics were emergency lighting and the supply of communication systems for ten frigates built for the Australian and New Zealand Navies (the ANZAC contract). 5 In 1992, Electronics expanded its operations into manufacturing and installing telecommunication systems in overseas countries that did not have developed telecommunications infrastructure. These systems included the Cellswitch system, a quite complex system involving mobile phones or radios at one end, and mobile phones, radios or landlines at the other end. The primary judge elaborated on this system, as follows: Software drives the switch and links the switch to the main network and provides billing information to the operator of the network on a user-generated system. The linkage into the main network may be a cable or wireless connection or it may be a satellite link or microwave. The cellswitch is a component within the system (tr. 583). The telecommunications towers that were constructed were an essential feature to the successful operation of the telecommunications system (tr.319). 6 In December 1993, the Group decided to transfer its banking business from the ANZ Bank to the National Australia Bank (NAB), as NAB was prepared to offer a facility of $35.2 million, some $5.2 million more than the ANZ Bank was then prepared to offer. 7 In April 1994, Pacific raised $15.34 million through share placements, and a further $1.324 million through a dividend reinvestment plan. 8 On 11 November 1994, Electronics entered into an agreement with Techin Trade Limited (Techin), a Delaware USA corporation, for the supply and installation of Cellswitch systems in Russia (the Russian contract), for a price of $US28 million (about $A37 million). 9 Pacific had requested NAB for an increase in total facilities of $10 million in September 1994. Following various meetings and communications, on 12 January 1995 NAB advised Pacific that it was willing to provide a $10 million temporary overdraft, to be available until 31 March 1995, on condition that steps be taken to raise additional equity of at least $35 million, from which the temporary overdraft was to be cleared. NAB also advised that a further $5 million would be made available on request, but only after entry into an underwriting agreement covering the equity raising. 10 Pacific advised NAB that it could not conclude the equity raising by 31 March 1995; and NAB wrote to Pacific on 16 January 1995 amending its offer to the effect that Pacific use its best endeavours to achieve an acceptable underwriting agreement by 15 March 1995 for an amount of at least $35 million. 11 On 18 January 1995, underwriters Burdett Buckeridge & Young (BBY) wrote to Pacific confirming BBY's willingness to underwrite an equity issue of $35 million, subject to the pricing of the issue; and on the same day the Board of Pacific resolved to accept NAB's amended offer. It also resolved to invite a representative from NAB to become a member or observer of a Due Diligence Committee established for the purpose of the equity raising. 12 The first meeting of the Due Diligence Committee occurred on 31 January 1995, and it was attended by Mr. Seaton, a partner of PW, who was identified as the Stanilite auditor. It was decided to recommend to the Board of Pacific that PW conduct a full audit of the accounts for the half year ended 31 December 1994, for the purpose of the rights issue which was part of the equity raising. This recommendation was accepted by the Board. 13 On 8 February 1995, Mr. Seaton wrote to Pacific, setting out PW's understanding of their function as auditors for the half year accounts, and asking acknowledgement of Pacific's agreement or otherwise to this understanding. 14 On 3 March 1995, Pacific announced to the ASX that there was a profit after tax for the half year to 31 December 1994 of $4.238 million, a marginal increase on the previous comparative period's net profit of $4.213 million. 15 On 10 March 1995, Pacific informed NAB that, as at 31 December 1994, two key balance sheet ratios exceeded bank requirements (meaning that Pacific was in breach of the terms of its facility agreement with NAB); and Pacific sought, if possible, confirmation that NAB considered the breaches minor and technical and that no action would be taken. 16 Between 10 and 13 March 1995, Mr. Seaton, with the assistance of Allan Chan of PW, prepared a letter addressed to the directors of Pacific, setting out a number of matters that "required serious consideration by the directors". One matter was revenue recognition on the Russian contract, which the letter described as "aggressive", in circumstances where no money had been received as at 31 December 1994, yet the accounts for the six months ended 31 December 1994 showed $12.8 million in revenue and $6.4 million in profit from that contract, on the so-called "earned value" basis set out in Accounting Standard AASB1009. Another matter was the going concern basis of the accounts, as to which the letter asserted a belief that the accounts should include a note which outlined the cash flow situation, stated that temporary credit facilities had been extended to the Group by its bankers, and stated that as at 31 December 1994 the Group was in breach of borrowing covenants. 17 This letter was considered at an audit committee meeting attended by Mr. Seaton on 13 March 1995; and Mr. Seaton also attended a Board meeting of Pacific on 15 March 1995. 18 By letter dated 15 March 1995, NAB advised Pacific that it had agreed to extend its facilities to 28 April 1995 on the same terms and conditions as previously agreed, and confirmed that no action would be taken in relation to the breach of financial undertakings as at 31 December 1994. 19 At a meeting of the Board of Pacific on 16 March 1995, attended by Mr. Seaton and Mr. Chan, Mr. Seaton is recorded as having said that, in view of the NAB letter, he was of the opinion that the accounts could be signed as a going concern. Mr Chan's note of the meeting records that the PW letter (referred to above) was used as a basis of discussion, but would not be formally issued. The directors signed the accounts for the half year ended 31 December 1994, and Mr. Seaton tabled an audit report signed by him on behalf of PW in the following terms: AUDITORS REPORT TO THE MEMBERS OF STANILITE PACIFIC LIMITED Scope We have audited the financial statements of the Company for the half-year ended 31 December 1994 as set out on schedule 1 to 5. The financial statements are the consolidated accounts of the economic entity comprising the Company and the entities it controlled at the end of, or during the half-year. The Company's directors are responsible for the preparation and presentation of the financial statements. We have conducted an independent audit of these financial statements to express our opinion on them in order for the Company to lodge them with the Australian Securities Commission. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements are free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly in accordance with applicable accounting standard AASB 1029: Half-year Accounts and Consolidated Accounts and the Corporations Law so as to present a view which is consistent with our understanding of the economic entity's state of affairs, the result of its operations and its cash flows. We have not acted as auditors of Stanilite Electronics (NZ) Limited and Stanilite (Hong Kong) Limited. We have, however, received sufficient information and explanations concerning these controlled entities to enable us to form an opinion on the consolidated accounts. The audit opinion expressed in this report has been formed on the above basis. Audit opinion In our opinion, the financial statements of the Company are properly drawn up: (a) so as to give a true and fair view of: (i) the state of affairs of the economic entity as at 31 December 1994 and its results and cash flows for the half-year ended on that date; and (ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements; (b) in accordance with the provisions of the Corporations Law; and (c) in accordance with applicable accounting standards AASB 1029: Half-year Accounts and Consolidated Accounts. (It was contended by the appellants that in doing so, Mr. Seaton and PW were in breach of their duty as auditors; but no claim is pressed for damages for that breach, because these proceedings were not commenced until 26 April 2001). 20 These accounts contained the following statement: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted by Stanilite Pacific Limited and controlled entities are stated to assist in a general understanding of these accounts. … (e) Operating Revenue Sales revenue represents revenue earned from the sale of the economic entity's products and services net of returns. Sales revenue on long term contracts has been brought to account based upon the percentage of completion. Other revenue includes proceeds from sale of property, plant and equipment, government grants and interest income on short-term investments. 21 On 23 March 1995, an amount of $US204,000.00 (equivalent to $A270,000.00) was deposited with NAB in New York, this being the only money ever received by Electronics under the Russian contract. 22 The equity raising of $35 million was to be by an underwritten placement of 6.5 million shares at $1.80 per share, raising $11.7 million to be received by 5 May 1995; and an underwritten 1:5 renouncable rights issue to all shareholders at $1.60 per share, to raise $23 million, to be paid to 80 cents on allotment (July 1995) with the balance of 80 cents payable in November 1995. A prospectus was required for the rights issue. 23 Mr. Seaton and Mr. Chan conducted a subsequent events review to 18 April 1995 in order to express an opinion as to whether any matters had arisen since 31 December 1994 that had a material impact on the audited accounts; and they concluded that no matter had arisen that impacted on the accounts or required specific disclosure in the prospectus. 24 On 2 May 1995, BBY wrote to Pacific advising that they had executed an underwriting agreement to support the placement of 6.5 million shares at $1.80 per share, that settlement of the placement was expected on 5 May, and that approximately 19 major domestic and international investment institutions had participated in the placement. 25 On 3 May 1995, PW wrote to the directors of Pacific giving Mr. Seaton's consent pursuant to s.1032 of the Corporations Law to the issue of the prospectus with his auditor's report dated 16 March 1995. (This is the basis of one of the claims in this case.) By another letter of the same date, PW advised that they did not believe that the issue of shares pursuant to the prospectus may involve conduct which was misleading or deceptive. 26 On the same day, there was a meeting of the Board of Pacific, at which an underwriting agreement with BBY and another underwriter was entered into, and the prospectus was approved. 27 The prospectus was dated 3 May 1995. As well as containing the financial statements of Pacific and controlled entities for the half year ended 31 December 1994, and the auditor's report dated 16 March 1995, the prospectus contained among other things the following information about the Russian contract: Techinfo (Russia) Network Supply Agreement This contract is dated 11th November 1994 and is between Stanilite Electronics Pty. Limited ("Electronics") and Techin Trade Limited ("TTL"). TTL is a company incorporated in Delaware, USA. The controlling shareholder of TTL controls the holder of a licence from The Ministry of Communications of the Russian Federation to provide a cellular radio-telephone service in the Krasnodar and other regions of Russia. Electronics has agreed to supply certain equipment and services necessary to establish and maintain a high capacity local, inter-regional and international wireless telephone system for digital/analogue mobile telephone systems in the Krasnodar region of Russia and in Omsk City. The new telephone system is to be connected to the public subscriber telephone network. The contract includes supply of Software and Electronics has granted TTL a royalty-free licence for use of the software. Electronics is also to provide training for the network operators and maintenance workers. Electronics has agreed to provide software support for a period of one year from the date of commissioning and certifying the system. The contract envisages several stages, of which only Stage 1 is quantified and confirmed. The contracted value to Electronics of Stage 1, Phase 1 is $US18,656,712 which is for supply of equipment and services. Stage 1, Phase 2 has a contracted value of $US9,857,722 giving a total contracted value of $US28,514,434. Stages 2 and 3 are subject to further purchase orders from TTL, which is likely to depend upon the development of adequate income from Stage 1 and project financing arrangements. Electronics expects that payment for stage 1 will occur over the next 12 to 18 months. Invoices issued by Electronics are payable progressively according to a formula in the contract based on projected revenue from users of the network once it is functional. Subject to the risks mentioned in Section 6 of this Prospectus and assuming that TTL and Electronics perform their respective obligations under the contract, payment to Electronics will amongst other things, depend upon: · rollout of the system by TTL; · remittance of money from the sale of terminals by regional operating companies to TTL, or directly to Stanilite at the direction of TTL; and · availability of US dollars from the Russian Central Bank. To date, TTL has paid $US204,000 to Electronics. Electronics anticipates that most of the monies owing under this contract will be paid within 12 months. If the expected rate of sales of terminals is not achieved, Electronics may delay the supply of further equipment until such supply is justified by sales of terminals. Electronics has the right to suspend deliveries and remove equipment if payments are not received at the rate specified in the contract. Ownership of the equipment does not pass until Electronics has received payment in full for the equipment. Electronics has taken security over certain assets of TTL and certain personal assets of TTL's principal shareholder and controller, but these securities currently have a low value (approximately $US300,000). Electronics has also received a limited ($US1.5 million) guarantee from the Novorossiijsk Sea Trading Port (a major financial backer of TTL) supported by equivalent funds in a Swiss bank account. The legal status of the guarantee is being examined by Stanilite and is presently unclear. Electronics has taken out EFIC export insurance for 60% of invoice amounts initially up to $7.4 million. This insurance is subject to a number of conditions including that: · all guarantees and securities nominated in the contract be in place by a date to be determined by EFIC; · licences and approvals remain in full force and effect before delivery of equipment onto the Russian sites; and · user terminals have been made available and the goods have been delivered on site in Russia with a Certificate of Acceptance issued. The company has satisfied the second and third conditions and is in the process of satisfying EFIC in respect of first. Due to factors set out in Section 6 of this Prospectus, including the under-developed legal system in Russia and difficulties in negotiating and implementing legal (including contractual) protection, enforcement of rights in relation to this contract, if necessary, could be difficult. 28 It contained the following information about NAB; National Australia Bank Stanilite has entered into a Facility Agreement with National Australia Bank limited ("NAB") dated 8th February 1994. Under this Facility Agreement and subsequent amendments, NAB has provided the Company with credit facilities totalling $49.25 million, of which $16.35 million is provided by way of temporary overdraft. The financial undertakings within the agreement include covenants that the company's: (a) total external liabilities must not exceed 65% of its total tangible assets; (b) total current assets must exceed 150% of its total current liabilities; (c) earnings before interest, tax, finance lease repayments, capital expenditure and research and development expenditure (net of depreciation and amortisation) must exceed 150% of gross interest expense plus finance lease repayments; (d) aggregate total assets of overseas subsidiaries must not exceed 5% of the aggregate total assets of the group; and (e) aggregate EBIT of overseas subsidiaries must not exceed 5% of the aggregate EBIT of the group At 30th June 1994 except for (d) Stanilite complied with all the above covenants. At 31st December 1994 compliance with covenants (b) and (e) was achieved and the NAB waived non-compliance with the others. The company has drawn down the full amount provided by way of temporary overdraft from NAB. Proceeds from the Placement and the Issue will be used to retire this temporary overdraft in full. Following repayment of the temporary overdraft facility the whole of the facilities provided by NAB will be reviewed by the company and NAB. 29 It also contained the following information about PW's consent: 11.8 Expert's Consent Price Waterhouse have given and have not, before lodgement of this Prospectus with the ASC, withdrawn their written consent to the issue of this Prospectus with their Auditor's Report dated 16th March 1995 on the financial statements of the company for the half year ended 31st December 1994 and reference to the 30th June 1994 annual financial statements included in the form and in the context in which it is included, and to be named in this Prospectus as auditors of Stanilite. 30 Meanwhile, on 2 May 1995, NAB had advised over the telephone that the temporary overdraft facility of $15 million would be increased by $1.65 million to accommodate $787,000.00 cash required for a dividend payment on 28 April 1995 and immediately pressing creditors, on the basis that on receipt of $11.7 million placement proceeds, the temporary overdraft would be reduced to $10 million. On 22 May 1995, NAB wrote to Pacific offering to extend the facilities to 31 July 1995 on certain conditions, including the appointment of Arthur Andersen as investigative accountants. This was accepted by Pacific on 26 May 1995. 31 By 8 May 1995, Pacific had received $11.5 million from the share placement; and on 30 June 1995, it received a further $11.5 million being the first instalment from the rights issue. 32 On 27 June 1995, Electronics signed a contract with Compagnia de Telephonos del Interior (CTI) of Argentina, for the supply and installation of systems in Argentina (the Argentinean contract) for a total consideration of $A33 million. 33 On 2 August 1995, NAB wrote to Pacific advising that Pacific was in default of the facility agreement in failing to pay $1.5 million by July, and giving an extension to 31 August 1995 to make this payment. 34 Arthur Andersen reported to NAB on 3 August 1995, expressing the view among other things that, whilst the company was utilising an accounting methodology sanctioned by its auditor, a more conservative accounting approach should be used in determining arrangements with a bank. 35 It appears that by 9 August 1995, Electronics had received the first payment of about $6 million under the Argentinean contract. On that day, NAB wrote to Pacific noting that, under the terms of its offer of 2 August 1995, the temporary overdraft facility was to be reduced by the whole of that payment. However, following further communications, on 29 August 1995 NAB permitted Pacific to use about one-half of that payment for its own purposes. 36 The Board of Pacific met on 30 August 1995, and unaudited accounts for the year ended 30 June 1995 were tabled. These accounts showed an operating profit for Pacific of $6.967 million, of which $5.4 million represented a dividend from Electronics; and they showed an operating profit for Electronics of $10.438 million. 37 However, this profit in Electronics was arrived at after including $11.8 million profit from the Russian contract and $10 million profit from the Argentinean contract. As at 30 June 1995, about $270,000.00 had been received under the Russian contract, and nothing had been received under the Argentinean contract. 38 The minutes of the Board meeting on 30 August 1995 noted: Approval of a final dividend for the year was deferred until audit of the accounts was completed, but the Board suggested that an amount of 4 cents per share be provided for in the accounts for this purpose. 39 On 11 September 1995, Mr. Seaton informed the audit committee that, subject to completion of a number of matters in respect of the audit, he had verified the company's results for the year ended 30 June 1995. He said he would require the Executive Directors to sign representation letters in respect of the accounts because the company had applied the "earned value" accounting concept to arrive at a profit for the year. He also suggested that, because of the difficulties being experienced with the Russian contract, a suitable note should be included in the statutory accounts to report on progress to date and the future risks associated with the project. Mr. Seaton agreed he would draft the appropriate note for inclusion in the accounts, with the assistance of Mr. Fayle, the Chief Financial Officer of Pacific. 40 The letter requested by Mr. Seaton was produced, and was dated 26 September 1995. It included the following: 7. TELECOMMUNCATIONS PROJECTS The directors are satisfied that proper procedures have been adopted in the recognition of profit on telecommunications projects for which the "earned valued" method of revenue recognition has been adopted. In particular, the directors have taken reasonable steps to ensure that the percentages of completion used in the calculations properly reflects the level of effort incurred on these projects. We make the following specific representation in relation to the following projects: (a) Australian Defence Air Traffic System Projects ("ADATS ") The directors, to the best of their knowledge, confirm that the contract for the project has been awarded to the economic entity with an estimated value of $26,442,000. The estimated related cost of completion for the project is $18,849,000. (b) Technin Trade Limited Network Supply Project (Russia Contract) The directors have taken reasonable steps to ascertain that the amounts of $23,052,000 representing contract work in progress and $5,738,000 representing trade debtors receivable in relation to the Russia Contract will be realised in full, having regard to the uncertainties described in Note 7 to the financial statements. 41 A note was drafted concerning the Russian contract, which was included as Note 7 in the accounts for the year ended 30 June 1995, in the following terms: Work in progress after deducting progress claims includes $8,702,000 (current) and $14,350,000 (non-current) including attributable profits to date, which relate to a contract dated 11th November 1994 (and as subsequently amended) for the installation of a telecommunications system in Russia with Techin Trade Limited (TTL). In addition, an amount of $5,738,000 is included in current trade debtors in relation to progress claims on the contract. The Group's ability to receive payment for work on this contract and the timing of those receipts is dependent on: (i) the approval of the system by Russian telecommunications authorities and its subsequent roll out by TTL; (ii) remittance of a contracted proportion of the proceeds from the sale of terminals, collection fee and call revenue by regional operating companies to TTL or directly to the economic entity at the discretion of TTL; and (iii) availability of US dollars from the Russian Central Bank. The directors have evaluated the technical and commercial risks associated with this contract. The testing of the system by the authorities is under way and the directors believe that approval of the system is imminent, based on company prepared forecasts in relation to the market in which the systems will operate. The directors consider that the allocation of the assets between current and non-current and recognition of the attributable profit is appropriate, notwithstanding the uncertainties inherent in the matters mentioned in the above paragraph. To date the economic entity has received $269,000 from TTL in relation to the contract. Ownership of the equipment does not pass until payment has been received in full. Export insurance for 60% of the invoiced amounts has been taken out with Export Finance and Insurance Corporation. In addition, the economic entity holds guarantees and other security estimated by the directors to have to (sic) a maximum value of $10 million. 42 On 11 September 1995, there was a meeting of the Board of Pacific, at which it was noted that the accounts had been reviewed by the audit committee and agreed to in principle by the auditor. That meeting resolved that the Board re-convene on 13 September to formally approve the accounts. At the meeting on 13 September, the Board agreed to release the accounts to the ASX, identified as being subject to final audit, and also resolved that a dividend of 4 cents per share be paid out of the profits earned for the year ended 30 June 1995 on 4 December 1995. 43 On 26 September 1995, PW gave an unqualified audit opinion for the accounts for the year ended 30 June 1995, containing the note referred to above. At a Board meeting on that day, it was resolved that the directors' statements in relation to those accounts be signed. 44 On 13 November 1995, Pacific announced to the market that it was experiencing revenue shortfalls and delays on the Russian contract; and on 23 November 1995, it made a further announcement, referring to a possible write-down of the company's investment in Russia. It continued: On the basis of figures presented to the Board today, it seems that a substantial loss is inevitable for the half year to December. 45 On 1 December 1995, Pacific announced to the market that 90% of the second instalment of the rights issue had been received. 46 4 December 1995 was the date for payment of the dividend referred to above. The total amount of the dividend was $5.452 million, but by reason of Pacific's dividend reinvestment plan, a net amount of $1.576 million was paid out. (This net amount is the subject of the second area of claim, based on the audit opinion concerning the 30 June accounts.) 47 On 8 December 1995, PW provided a report to Pacific concerning its audit of the accounts for the year ended 30 June 1995. 48 As at 31 December 1995, the consolidated trading results of the Group showed losses of $41.6 million for December and $55.48 million for the year to date. 49 In the early months of 1996, there was nothing more received under the Russian contract, and there were continuing problems with the Argentinean contract. 50 On 22 May 1996, the Board of Pacific resolved to request NAB to appoint a receiver and manager to Pacific and its subsidiaries. A liquidator was appointed on 26 August 1996. CLAIMS OF APPELLANTS 51 Relevantly to the issues in this appeal, the appellants made two broad claims. Prospectus Consent 52 The appellants claimed that Electronics was caused damage by breaches of duty by Mr. Seaton and PW in giving consent to the issue of the prospectus containing the auditor's report dated 16 March 1995, as being a breach of contract, of a duty of care and of statutory duty, and also by associated misleading conduct by Mr. Seaton and PW. 53 The most relevant allegations in the final version of the Statement of Claim were the following: 21. In purported performance of the contracts of general and specific retainer and in discharge of their duty of care, Price Waterhouse represented in relation to the December 1994 audited accounts that: (a) they had audited the financial statements of Stanilite Pacific and Stanilite Electronics for the half year ended 31 December 1994 to express their opinion on them in order that Stanilite Pacific could raise capital from institutional investors and from the public, the latter via a prospectus; (b) their audit had been conducted in accordance with Australian Auditing Standards and applicable accounting standards to provide reasonable assurance as to whether the financial statements were free of material misstatement; (c) the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up so as to give a true and fair view of the statement of affairs of the economic entity as at 31 December 1994 and its results and cash flows for the half-year ended on that date; and the other matters required by Divisions 4, 4A, 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements; (d) the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with the provisions of the Corporations Law; (e) the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with applicable accounting standard AASB 1029: Half-yearly accounts and Consolidated Accounts; (f) Price Waterhouse had engaged in a full audit of the accounts for the half year ended 31 December 1994 in accordance with the letters of engagement dated 8 February 1995, 24 March 1995 and 3 May 1995 respectively from Price Waterhouse to Stanilite Pacific; and (g) Price Waterhouse had complied with the obligations referred to in the letters of engagement dated 8 February 1995, 24 March 1995 and 3 May 1995 respectively from Price Waterhouse to Stanilite Pacific. ("the First Representations") Breach 22. From on or about 16 March 1995 when they provided their initial audit opinion on the December 1994 audited accounts until 3 May 1995 Price Waterhouse breached, and continued to breach, the contract of general retainer, the contract of specific retainer, the duty of care and the statutory duty which it owed to Stanilite Pacific and Stanilite Electronics. PARTICULARS I. Price Waterhouse issued an unqualified audit opinion on the December 1994 audited accounts in circumstances where: (a) the financial statements showed revenue from a number of risky telecommunications contracts by application of the earned value method, when the method of applying the earned value method was inappropriate for such contracts. The way in which the earned value method was used had the effect of bringing revenue to account when certain unilaterally determined milestones were passed, notwithstanding that the conditions or requirements for recognising revenue under Australian Accounting Standards, including AASB 1009 Accounting for Construction Contracts, had not been met. The work in progress account was debited on each such milestone and the revenue account was credited. Revenue was therefore shown as having been earned before the requisite criteria for revenue recognition under Australian Accounting Standards, including AASB 1009 Accounting for Construction Contracts, had been satisfied; … II. Price Waterhouse failed to properly prepare all necessary qualifications and disclosures in the December 1994 audited accounts. … 24A. Price Waterhouse knew or ought to have known, […]: (a) the accounts as presented by the directors to the auditors did not show a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics; (b) the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics were not such as would make capital raising from institutional investors or the public, feasible, if a true and fair view of such affairs were presented in the accounts and if they were prepared in accordance with the applicable accounting standards; and (c) Price Waterhouse ought not sign an unqualified audit report as auditors or state that the accounts represented a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics and that the accounts had been prepared in accordance with applicable accounting standards, unless and until they were amended to take account of the matters referred to in the letter of advice from Price Waterhouse to the directors of Stanilite Pacific dated 13 March 1995. 26. In the premises Price Waterhouse owed a duty to Stanilite Pacific and Stanilite Electronics to exercise reasonable care in making the First Representantions. 27. In breach of the duty alleged in paragraph 26 above Price Waterhouse failed to exercise reasonable skill and care in making the First Representations. PARTICULARS The plaintiffs repeat paragraphs 22 to 24A above. 29. Each and every one of the First Representations was made in connection with a dealing in securities within the meaning of section 995(2) of the Corporations Law. 30. In making each and every one of the First Representations, Price Waterhouse engaged in conduct that was misleading or deceptive or likely to mislead or deceive, in contravention of the Corporations Law. The issue raised on appeal concerning the qualifications and disclosures referred to in Particular II above related to a qualification or disclosure concerning the signing of the accounts on a going concern basis. 54 The appellants also alleged breach of duty by PW in giving consent to the issue of the prospectus containing its audit opinion; and in substance claimed that these breaches caused loss to Electronics, by reason of causing Electronics to continue to trade and to incur additional losses that were ultimately quantified at $28.235 million. 30 June 1995 Audit 55 The appellants claimed that Pacific was caused damage by the audit opinion on 30 June 1995 accounts, in that Pacific was caused to pay a dividend in a net amount of $1.576 million which it otherwise would not have paid. 56 The relevant allegations in the Statement of Claim were as follows: 46. In purported performance of the contract of general retainer and in purported discharge of their duty of care, Price Waterhouse, represented on 26 September 1995 that: (a) they had audited the financial statements of Stanilite Pacific and Stanilite Electronics for the financial year ended 30 June 1995 to express their opinion on them in order that the directors of Stanilite Pacific and Stanilite Electronics could make proper decisions based on the assumption that the audited accounts were prepared in accordance with applicable accounting standards and constituted a true and fair view of the companies' financial affairs as at 30 June 1995; (b) their audit had been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements were free of material misstatement; (c) the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up so as to give a true and fair view of the statement of affairs of the economic entity as at 30 June 1995 and its results and cash flows for the financial year ended on that date; and the other matters required by Divisions 4, 4A, 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements; (d) the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with the provisions of the Corporations Law; and (e) the financial statements of Stanilite Pacific and Stanilite Electronics were, in their opinion, properly drawn up in accordance with applicable accounting standards. ("the Second Representations") Breach 47. From on or about 26 September 1995 when they sent the June 1995 audited accounts to Stanilite and Stanilite Electronics, Price Waterhouse breached, and continued to breach, the contract of general retainer, the statutory duty and the duty of care which they owed to Stanilite Pacific and Stanilite Electronics. PARTICULARS I. On or about 26 September 1995, Price Waterhouse issued an unqualified audited opinion on the June 1995 audited accounts in circumstances where: (a) the financial statements showed revenue from a number of risky telecommunications contracts, including the Argentinian (sic) contract by application of the earned value method, when the method of applying the earned value method was inappropriate for such contracts. The way in which the earned value method was used had the effect of bringing revenue to account when certain unilaterally determined milestones were passed, notwithstanding that the conditions or requirements for recognising revenue under Australian Accounting Standards, including AASB 1009, had not been met. The work in progress account was debited on each such milestone and the revenue account was credited. Revenue was therefore shown as having been earned before the requisite criteria for revenue recognition under Australian Accounting Standards, including AASB 1009, had been satisfied; … II. Price Waterhouse failed to properly prepare all necessary qualifications and disclosures in the June 1995 audited accounts. 48A. Price Waterhouse knew […] that: (a) the accounts as presented by the directors to the auditors did not show a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities, including Stanilite Electronics; (b) the June 1995 audited accounts were flawed and ought not to have been used as basis for further action; and (c) Price Waterhouse ought not sign the accounts for the year ended 30 June 1995 or represent that they represented a true and fair view of the financial affairs of Stanilite Pacific or its controlled entities including Stanilite Electronics or that they had been prepared in accordance with applicable accounting standards unless and until they were amended to take account of the matters referred to in the letter from Price Waterhouse to the directors of Stanilite Pacific dated 8 December 1995. 50. In the premises Price Waterhouse owed a duty to Stanilite Pacific and Stanilite Electronics to exercise reasonable care in making the Second Representations. 51. In breach of the duty alleged in paragraph 50 above Price Waterhouse failed to exercise reasonable skill and care in making the Second Representations. PARTICULARS The plaintiffs repeat paragraphs 47, 48 and 48A above. STATUTORY PROVISIONS 57 At material times, the Corporations Law 1989 (the Law) had the following provisions concerning financial statements, in Part 3.6: 292. Subject to section 293A, a company's directors shall, before the deadline after an accounting period, cause to be made out a profit and loss account for that accounting period that gives a true and fair view of the company's profit or loss for that accounting period. 293. Subject to section 293A, a company's directors shall, before the deadline after an accounting period, cause to be made out a balance-sheet as at the end of that accounting period that gives a true and fair view of the company's state of affairs as at the end of that accounting period. 297(1) A company's directors shall ensure that the company's financial statements for an accounting period comply with such of the prescribed requirements as are relevant to the financial statements. 298(1) Subject to section 297, a company's directors shall ensure that the company's financial statements for an accounting period are made out in accordance with applicable accounting standards. 299(1) If a company's financial statements for an accounting period, as prepared in accordance with sections 297 and 298, would not otherwise give a true and fair view of the matters with which this Part requires them to deal, the directors must add such information and explanations as will give a true and fair view of those matters. (2) Nothing in subsection (1), or in section 297 or 298, limits the generality of a provision of this Division or of Division 4 or 4A, other than this section or section 297 or 298. 58 The accounting standard most relevant to this appeal is AASB 1009, entitled Accounting for Construction Contracts, as it was in 1995. The relevant provisions of that standard are the following: Statement of purpose .03 The purpose of this accounting standard is to require in respect of construction contracts in progress - (a) profits to be progressively brought to account; (b) losses to be brought to account as soon as they are foreseeable; and (c) the disclosure of material information so that users entitled to rely on the accounts or group accounts are able to assess the financial effects of those contracts on the company or group of companies. Interpretation .04 (1) This standard is to be interpreted in accordance with the Corporations Law, including Parts 1.2 and 3.6. The endorsed explanatory material contained in this standard can be used, subject to section 109J of the Corporations Law, as an aid to interpreting the accounting standards contained in this standard. (2) Except for the citation of a replaced or superseded standard in an application clause, any reference to this standard to a standard approved by the Accounting Standards Review Board shall be taken to include the standard as subsequently amended or replaced by a standard made by the Australian Accounting Standards Board as it applies to the financial year for which the accounts and group accounts are being prepared. Definitions .06 In this approved accounting standard unless the contrary contention appears - … "cost plus contract" means a construction contract where the contractor agrees to be reimbursed for agreed costs, plus an additional amount whether calculated as a fixed fee or as a percentage of agreed costs; "fixed price contract" means a construction contract where the contractor agrees to a fixed total contract price or to a fixed charge per unit of work, whether or not such contract includes a rise and fall clause; Fixed price contracts .10 The amount of profit on fixed price contracts shall be brought to account in accordance with the percentage of completion method when all of the following conditions are satisfied - (a) total contract revenues to be received can be reliably estimated; (b) the costs to complete the contract can be reliably estimated; (c) the stage of contract completion can be reliably determined; and (d) the costs attributable to the contract to date can be clearly identified and can be compared with prior estimates. Cost plus contracts .11 The amount of profit on cost plus contracts shall be brought to account in accordance with the percentage of completion method when all of the following conditions are satisfied - (a) the costs attributable to the contract to date can be clearly identified; (b) costs other than those that are specifically reimbursable under the contract can be reliably estimated; and (c) where payment under the terms of the contract is calculated by reference to the stage of completion – that stage can be reliably determined. Conditions not satisfied .12 If the conditions specified in clause .10 or clause .11, whichever is appropriate to the form of contract used, are not satisfied, either at the inception of a construction contract or during the course of a contract, no profit shall be brought to account until they are so satisfied. Provision for foreseeable losses .20 A material loss on a construction contract, whether in relation to work completed or yet to be completed, shall be brought to account as soon as it is foreseeable. Variations and penalties .40 Amounts recoverable in respect of claims and variations shall be brought to account as revenue where the following conditions are satisfied - (a) there is reasonable assurance that additional revenue will result from such claim; and (b) the amount recoverable can be reliably estimated. COMMENTARY Approach of AASB 1009 (i) The percentage of completion method provides a measure of periodic accomplishment. Application of the percentage of completion method involves estimates, particularly in respect of revenue and costs. This accounting standard requires that periodic profit on a construction contract is to be determined on the percentage of completion basis and brought to account when progress on the construction contract permits the outcome of a contract to be reliably estimated. This may occur in some circumstances only on completion of the contract. Measurement of the percentage of completion (ii) The percentage of completion method can be measured in three ways - (a) physical estimates or surveys of the work performed to date; (b) the costs basis – this method involves calculating the proportion that costs incurred to date bear to the estimated total costs of the contract; and (c) the billings basis – this method involves calculating the proportion that billings to date bear to the total estimated billings for the contract and should only be applied when it provides a reliable measure of work performed. (iii) When the percentage of contract completion is measured using the cost basis, adjustments are to be made to include only those costs that reflect work performed. Examples of items which may need adjustment are - (a) materials purchased that have not been installed or used in the contract performance; (b) payments to subcontractors to the extent that they do not reflect the amount of work performed under subcontracts; and (c) penalties incurred by the contractor. Costs of construction contracts (iv) The costs incurred by a company or group that undertakes construction contracts can be divided into - (a) costs that relate directly to a specific contract, for example: · direct labour costs (labour employed specifically on a contract including direct supervision); · direct materials (materials used in the contract); · depreciation of plant and equipment used on a contract; · costs of moving plant and equipment to and from a site; · expected warranty costs. (b) costs that are attributable to the contract activity in general and are capable of being allocated on a reasonable and consistent basis to specific contracts, for example: · tender preparation; · insurance; · design and technical assistance; · project overheads. (c) costs that relate to the activities of the company or group generally, or that relate to contract activity generally and are normally not related to specific contracts; for example: · general administration and selling costs; · finance costs; · research and development costs; · depreciation of idle plant and equipment. (v) Costs referred to in paragraph (iv)(c) are usually excluded from accumulated contract costs because they do not relate to reaching the present stage of completion of a specific contract. However, in circumstances where such costs are capable of being attributed to a particular contract they may be included as part of accumulated contract costs. Provision for foreseeable losses (vi) When current estimates of total contract costs and revenues for any contract indicate that a material loss is probable, the loss is to be brought to account regardless of the amount of work performed on the contract. Periodic review of profit and construction work in progress (vii) Application of the standard necessarily involves periodic assessment of the percentage of completion reached and of the total estimated profits on a contract. The profit brought to account in any one period may reflect an adjustment to the profit on the contract previously brought to account. In addition the application of the standard requires that the amount of construction work in progress carried in the balance sheet be reviewed regularly. Any amount not recoverable is required to be written off. Claims by the contractor (viii) In some contracts a contractor may claim compensation, in addition to the agreed contract price, for customer caused delays, errors in specification and design or for other reasons which were unforeseen and which resulted in additional cost to the contractor. The existence of possible claims may be known before completion of the contract, or may only emerge after the physical completion of the contract. These claims may not be settled for the amount which the contractor originally proposes as fair compensation as the ultimate amount to be collected depends on many factors, including the contractor's negotiating ability, the financial strength of the two parties, and the cost implications of possible litigation. Variation orders (ix) A variation order involves a change in the scope of the work to be performed under the contract. Variation orders include changes in the method or manner of the work, changes in specifications or designs and changes in the period of completion of the work. Variation orders can be initiated by either the contractor or the customer. They may also be priced or unpriced. Unpriced variation orders define the work to be performed, but the adjustment to the contract price is to be determined at a later date. (x) Where variation orders are priced and agreed upon by the parties to the contract, the contract revenues and costs are to be adjusted to reflect the variation order. (xi) Contractor initiated changes have the attributes of a claim and are to be evaluated in the light of the criteria specified in clause .40. (xii) Additional revenue from unpriced customer initiated changes are to be brought to account on the basis specified in clause .40. Penalty clauses (xiii) Many construction contracts contain provision for penalties for falling short of various performance standards stipulated in the contract, for example, failure to complete the contract by the stipulated date. Such penalties are to be brought to account as costs when it is probable that the criteria specified in the contract as minimum levels of performance will not be met. Reward clauses (xiv) A limited number of construction contracts include reward clauses for bettering the specified performance standards. Revenues from such clauses are required by the standard to be brought to account when there is reasonable assurance that the criteria specified in the contract have been met. Performance guarantees (xv) Many construction contracts require that security be given by the contractor to the client before commencing the contract guaranteeing the performance of the contractor during the construction and maintenance periods. The security may take several forms, including: (a) lodging of assets (including cash, government bonds or inscribed stock); and (b) third party guarantees (including bank guarantees, insurance bonds or insurance guarantee policies). Retention allowances (xvi) Retention allowances are amounts of contract revenue which have been included in progress billings and have been withheld from payment by customers until a final acceptance of satisfactory completion of the job or the end of a specified period. They are brought to account as amounts receivable from customers. Advances on account of construction work in progress (xvii) Advances on account of construction work in progress are a liability of the contractor. Disclosure of accounting policies (xviii) As is required under ASRB 1001 "Accounting Policies – Disclosure" the summary of accounting policies included in the accounts or group accounts will provide details of all policies which have been significant in the preparation and presentation of accounts and group accounts. The summary will therefore include all material details of the basis used to bring to account profits on construction contracts. This could include, for example, details of the minimum percentage of completion at which profits are initially brought to account in respect of contracts for various kinds of construction work. Examples of construction contracts (xix) Examples of construction contracts include, but are not limited to, contracts for general building, heavy earth moving, dredging, demolition, dams, pipelines, tunnels, ships and transport vessels. 59 The Corporations Law at the relevant time contained the following provisions concerning auditor's reports: 331A(1) A company's auditor must report on: (a) the company's financial statements for an accounting period; and (b) the company's accounting records and other records relating to those financial statements. 331AA(1) Subject to this section, sections 331B, 331C, 331D and 331E must be complied with in relation to the report. (2) If the accounting period is a half-year, the report may instead: (a) state whether, as a result of a review of the financial statements, any matter has come to the auditor's attention that causes the auditor to believe that they are not drawn up as mentioned in subsection 331B (1); and (b) if a matter or matters have so come to the auditor's attention that cause the auditor so to believe - include a description of the matter or matters and a statement of the auditor's reasons for that belief. (3) If the report complies with subsection (2), sections 331B, 331C, 331D and 331E do not apply to the report. 331B(1) The report must state whether or not, in the auditor's opinion, the financial statements are properly drawn up: (a) so as to give a true and fair view of the matters with which Divisions 4, 4A and 4B of Part 3.6 require them to deal (or, in the case of a prescribed corporation as defined by section 408A, with which Part 3.6 requires them to deal); and (b) in accordance with this Law; and (c) in accordance with applicable accounting standards. (2) If, in the auditor's opinion, the financial statements are not drawn up in accordance with a particular applicable accounting standard, the report must give particulars of the quantified financial effect on the financial statements of failing to draw them up in accordance with that accounting standard. (3) If the auditor is not satisfied about a matter referred to in subsection (1) or (2), the report must state why not. 331D The report must describe: (a) any defect or irregularity in the financial statements; and (b) any matter that the financial statements do not set out and to which one must have regard in order to obtain a true and fair view of the matters with which the financial statements deal. 60 The Corporations Law contained the following provisions concerning misleading conduct: 995(2) A person shall not, in or in connection with: (a) any dealing in securities; or (b) without limiting the generality of paragraph (a): (i) the allotment or issue of securities; (ii) any prospectus issued, or notice published, in relation to securities; (iii) the making of takeover offers or a takeover announcement, or the making of an evaluation of, or of a recommendation in relation to, takeover offers or offers constituted by a takeover announcement; or (iv) the carrying on of any negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any matter referred to in subparagraph (i), (ii) or (iii); engage in conduct that is misleading or deceptive or is likely to mislead or deceive. 999. A person must not make a statement, or disseminate information, that is false in a material particular or materially misleading and: (aa) is likely to induce other persons to subscribe for securities; or (a) is likely to induce the sale or purchase of securities by other persons; or (b) is likely to have the effect of increasing, reducing, maintaining or stabilising the market price of securities; if, when the person makes the statement or disseminates the information: (c) the person does not care whether the statement or information is true or false; or (d) the person knows or ought reasonably to have known that the statement or information is false in a material particular or materially misleading. 1005(1) Subject to the following sections of this Division, a person who suffers loss or damage by conduct of another person that was engaged in in contravention of a provision of this Part or Part 7.12 may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention. … 1006(1) This section applies for the purposes of an action under section 1005 in respect of conduct being the issue of a prospectus in relation to securities of a corporation: (a) in which there is a material statement that is false or misleading; or (b) from which there is a material omission. (2) The reference in subsection 1005 (1) to any person involved in the contravention includes a reference to all or any of the following persons: … (e) if the prospectus includes a statement that purports to be, or to be based on, a statement made by an expert and the expert gave consent under section 1032 to the issue of the prospectus - that expert; … (g) a person named, with the consent of the person, in the prospectus as an auditor, banker or solicitor of the corporation or for or in relation to the issue or proposed issue of securities; 61 The Corporations Law also contained the following provision concerning consent to the use in a prospectus of an expert's report: 1032 A person shall not issue a prospectus in relation to securities of a corporation that includes a statement purporting to be made by an expert or to be based on a statement made by an expert unless: (a) the expert has given, and has not, before lodgment of the prospectus, withdrawn, the expert's written consent to the issue of the prospectus with the statement included in the form and context in which it is included; and (b) there appears in the prospectus a statement that the expert has given, and has not withdrawn, the expert's consent. 62 The accounting standard AASB 1009 is a provision with statutory force. Also relevant to the case is a Statement of Accounting Concepts SAC4 entitled "Definition and Recognition of the Elements of Financial Statements" issued by the Australian Accounting Research Foundation and the Accounting Standards Review Board. The primary judge's judgment refers to parts of SAC4 in the form it took as re-issued in March 1995. However, since the relevance of this statement can only be to throw light on the understanding of accountants and auditors concerning terms used in ASB 1009, the version of the statement originally issued in March 1992 may be of more relevance to the case. There does not appear to be any difference of substance between the two versions, but I will set out the relevant parts of the version issued in March 1992. They are paragraphs 4, 6, 95, 109-115, and paragraph 40 of the appendix. Status of Statements of Accounting Concepts and Accounting Standards 4. To the extent of any incompatibility between an Accounting Standard and a Statement of Accounting Concepts, the requirements of the Standard prevail. 6. The objectives of this Statement are to establish definitions of the elements of financial statements and to specify criteria for their recognition in financial statements that are consistent with the objective of general purpose financial reporting. This should ensure consistent and appropriate application of the concepts of assets, liabilities, equity, revenues and expenses in the development of Accounting Standards and in the review of existing Standards. It should also provide a basis upon which preparers and auditors of general purpose financial reports in both the public and private sectors can make informed assessments of the appropriate accounting treatment of those transactions and other events that are not specifically dealt with in Accounting Standards. 95. "Revenues" are inflows or other enhancements, or savings in outflows, of service potential or future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period. Criteria for Recognition of Revenues 109 A revenue shall be recognised in the operating statement, in the determination of the result for the reporting period, when and only when: (a) it is probable that the inflow or other enhancement or saving in outflows of service potential or future economic benefits has occurred; and (b) the inflow or other enhancement or saving in outflows of service potential or future economic benefits can be measured reliably. Probable inflow or other enhancement or saving in outflows of service potential or future economic benefits 110. For a revenue to be recognised, it must be probable that the inflow or other enhancement or saving in outflows or service potential or future economic benefits has occurred. The term "probable" means that the chance of the inflow or other enhancement or saving in outflows of service potential or future economic benefits having occurred is more likely rather than less likely. 111. The probability of such inflows or other enhancements or savings in outflows of service potential or future economic benefits will vary. Assessments of the degree of certainty attaching to the inflows or other enhancements or savings in outflows of service potential or future economic benefits in any particular situation should be made on the basis of available evidence. For many entities, the majority of revenues will result from the provision of goods and services during the reporting period and the large majority of underlying transactions and other events will involve little or no uncertainty that an inflow or other enhancement or saving in outflows of service potential or future economic benefits has occurred, since the entity will either have received cash or have an explicit claim against an external party. However, an absence of an exchange transaction will often raise doubts about whether the requisite degree of certainty has been attained. In situations where there is uncertainty about the inflow or other enhancement or saving in outflows of service potential or future economic benefits, revenues are recognised when the inflow or other enhancement or savings in outflows is probable. Reliable measurement 112. For an item of revenue to be recognised it is also necessary that the inflow or other enhancement or saving in outflows of service potential or future economic benefits can be measured reliably. In most cases the inflow or other enhancement or saving in outflows of service potential or future economic benefits will be clearly evident and will be capable of measurement with a high degree of reliability. However, in some cases the inflow or other enhancement or saving in outflows of service potential or future economic benefits will be the subject of estimates. For example, in accounting for construction contracts the stage of contract completion and/or the amount of revenues that will ultimately be recognised can be uncertain and would need to be estimated. In such cases revenues are recognised only if the inflow or other enhancement or saving in outflows of service potential or future economic benefits can be measured reliably. Impact of accounting model adopted 113. The accounting model adopted and its underlying concepts of capital and capital maintenance will affect the timing of the recognition of revenues. For example, in an historical cost model assets are measured in terms of the nominal dollars that it cost to acquire the service potential or future economic benefits comprising those assets. Although an increase in the value of assets held measured for example by reference to market selling prices, could be considered to represent an enhancement of service potential or future, economic benefits and, therefore, an item of revenue, the increase in value is not normally recognised until the assets are sold and there is an inflow of service potential or future economic benefits in the form of the proceeds from sale or a claim thereto. This is because the historical cost model is transaction based and the occurrence of a transaction with an external party (a sale) is normally considered to be a necessary condition for the enhancement in an asset's value to be recognised as an item of revenue. In an exit price model, the enhancement of service potential or future economic benefits in the form of increased market selling prices of assets held by the entity will be recognised as prices change. Under that model, revenues do not arise upon sale of the assets, as the sales reflect an exchange of assets of the same value in terms of command over current cash equivalents. Transaction-based models for revenue recognition 114. Under transaction-based accounting models, it would not be possible to specify detailed tests which, for any entity, would identify the appropriate point at which revenues from the provision of goods and services should be recognised. However, consideration of the following tests will be useful in many situations in identifying whether, for a transaction involving the provision of goods or services, it would be probable that an inflow of service potential or future economic benefits will have occurred and will be capable of being measured reliably: (a) an agreement for the provision of the goods or services exists between the entity and one or more parties external to the entity; (b) cash has been received, or the entity has a claim against an external party or parties that: (i) is for a specified consideration, in the form of cash, other assets, or a reduction in a liability of the entity; and (ii) cannot be avoided by the external party or parties without the incurrence of a penalty set sufficiently large as, in normal circumstances, to deter avoidance; (c) all acts of performance necessary to establish a valid claim against the external party or parties have been completed; and (d) it is possible to estimate reliably the collectability of debts or the return of the goods sold. 115. Where all of these tests are met, the definition and recognition criteria for revenues will be satisfied, because it will be probable that an inflow of service potential or future economic benefits has occurred in respect of the entity's acts of performance and because the service potential or future economic benefits that have been, or will be, received can be measured reliably. However, the tests identified in paragraph 114 should not be regarded as pre-requisites for recognition of revenues. There will be situations where the recognition criteria for revenues will be considered to have been met even though one or more of those tests have not been satisfied. 40. Transactions involving the sale of goods or other assets with conditions attached need to be reviewed to assess whether control of the service potential or future economic benefits embodied in the assets has passed from the vendor to the purchaser and whether it is probable that the inflow of service potential or future economic benefits to the vendor has occurred. For example, goods may be sold subject to reservation of title, whereby a stipulation is placed in a sale of goods agreement to the effect that ownership of the goods does not pass to the purchaser until the time of payment. The vendor, while possessing legal title in the transferred goods and therefore the right to resume possession in the event of the buyer's default, has effectively passed to the purchaser control over the service potential of future economic benefits embodied in the transferred goods. The passing of control by the vendor would be expected to coincide with the gaining of control by the vendor over the consideration for the transferred goods. As such, it would be probable that the inflow of service potential or future economic benefits would have occurred at the time the vendor established a valid claim against the purchaser and, provided that the inflow of service potential or future economic benefits can be measured reliably, revenues should be recognised. CONTRACTUAL TERMS 63 There was some debate as to the effect of Attachment 9 to the Russian contract on Techin's liability to pay the price specified in the contract. Attachment 9 was in the following terms: 1. Stanilite will prepare and deliver invoices which shall be due for payment 28 days after the date of their delivery to the Purchaser for: (a) Equipment delivered, at the time of delivery to Novorossiinsjk. (b) Software delivered, at the time of delivery to Novorossiinsjk (c) Services delivered, at the time of Acceptance for each site. 2. The Purchaser shall use its best endeavours to satisfy the invoices by progressive payments to be made to Stanilite generally in accordance with the "Revenue in" predictions shown in the Financial Model included in Attachment 11 and on the basis of: (i) 70% of the audited receipts of monies from the Users by the Operating Company(ies) for the sales of the User Terminals supplied under this Agreement, plus; (ii) 70% of all audited receipts from Users for connection fees, rental fees, and call and/or usage charges made by itself and the Operating Company(ies) or other associated Companies, plus; (iii) A percentage of all call and/or usage charges including transit charges associated with the operation and use of the Earth Stations associated with the Techinfo Network. Such percentage shall be adjusted from time to time in the event that other payments fail to achieve a rate of payment to achieve payment in full by the due date. (iv) 10% of nett profit of the Purchaser accumulated over the period of the Financial Model (expected to be US $600,000) payable at the 31 August 1995. The purchaser shall provide a certified financial statement prepared by its US Auditors to support the amount paid. Stanilite will not share in any losses whatsoever made by the Purchaser. 3. Progressive payments shall be by telegraphic transfer, in US Dollars, on the basis of weekly receipts in the case of item (i), monthly receipts in the cases of items (ii) and (iii) and at 31 August 1995 for item (iv) above. All payments shall be made not exceeding 2 days in arrears. The purchaser shall report Sales of User Terminals and Connections to the Network on a weekly basis and allow full access to Sales and Billing records along with the billing and registration data on the Cellswitch Network to allow monitoring of performance. 4. Should payments not be received by Stanilite at an acceptable rate (as set out in the Financial Model as at Attachment 11) or by the Due Date, then Stanilite may suspend or cancel subsequent deliveries in accordance with Clause 7, and reserves the right to decommission (remove from service) any and all equipment supplied under this Agreement for which payment has not been received. THE OUTLINE 64 At the commencement of the trial, the primary judge sought clarification of the appellants' claim, and in response the appellants provided a document entitled "Plaintiffs' Outline Of What Price Waterhouse Ought To Have Done" (the Outline). 65 In relation to the appellants' claims concerning the prospectus consent, the paragraphs of the Outline still relevant are paragraphs 12 and 13, in the following terms: 12. As at 31 December 1994 the group was in breach of borrowing covenants set out in the banking facility, and the credit facilities extended to the group by the National Australia Bank were temporary and conditional. These matters were such as to affect the group's capacity to continue as a going concern, and to require a note to the accounts, even if a favourable letter from the bank was obtained. (Going Concern) 13. The total revenue recognised in the financial statements for the Russian Contract was $12.8m, with profit of $6.4m, although the accounting standards for earned value revenue/profit recognition had not been met, in that, amongst other matters the Russian Contract was not a construction contract. In particular, there could be no assurance that the revenue would actually be received as its right to receive cash depended on Techin Trade selling the terminals to third parties. Further, and in any event, full revenue and profit had been recognised on partially completed projects, which is in itself inconsistent with earned value methodology. (The Russian contract) 66 In relation to the appellants' claims concerning the 1995 audit, the paragraph relevant to this appeal is paragraph 31, in the following terms: 31. Revenue on contracts for the supply of equipment was being improperly recognised on an "earned value" basis, which was not applicable. Furthermore, the methodology for recognising revenue on that basis was not being followed, and was not being applied consistently. DECISION OF PRIMARY JUDGE 67 The primary judge's judgment dealt with many matters that are no longer at issue in the appeal. For example, it is no longer contended that either the Russian contract or the Argentinean contract was not a construction contract to which AASB 1009 applied. 68 On the important question whether the requirements of clause .10 of AASB 1009 could be satisfied if the amount that would actually be received under the contract could not be reliably estimated, the primary judge said this at par.[228]: 228 The plaintiffs analysed all of the deficiencies that had occurred in respect of the contractual relationship between the plaintiffs and Techin. Those factors included the failure to provide the security as requested, referred to earlier in this judgment; the suspension of deliveries because of the failure to provide the appropriate security; the fact that cash receipts had slipped behind the forecast; the technical difficulties experienced in installation of the network, understood by the defendant to be minor; the fact that Techin was experiencing some cash flow problems; and an apparent disputation between Techin and their United States lawyers. The defendants accepted that these were all matters to be taken into account by an auditor in determining whether the entity had a claim against an external party that was likely to be satisfied. It was submitted by the defendants, a submission with which I agree, that such a process is an entirely separate one from the process of determining whether total contract revenues can be reliably estimated as required by clause .10 (a) of AASB 1009. If such matters weigh the balance to the point where a material loss is foreseeable then that will be brought to account. But this process is different. 69 The primary judge then said this concerning evidence from the defendant (Mr. Seaton): 229 The cross-examination of the defendant in respect of the difference between contract performance and questions of revenue recognition was, in my view, of assistance on this aspect of the matter. That evidence was as follows: Q. If the buyer doesn't have the ability to satisfy the act under the contract, you would not in 1994 and 1995 use the percentage of completion method? A. I think you could use that method to determine the profit and revenue of the contract but I think however you would then have a separate question, quite separate question which is now going back and perhaps looking at SAC 4 and saying are the assets which result from applying the accounting standards recoverable and that to me is a different question altogether as to whether you can account for the contract under the percentage of profit (sic) method. … Q. Is this the situation. If you had a situation which the buyer didn't have the ability to satisfy his obligations under the contract, you could use a percentage profit method but not recognise an asset or revenues to be received under the long term contract which is under consideration until such time as you have satisfied yourself that the buyer has obtained that ability? A. I am, I don't think this would be at all probable that anyone would enter into a contract if they did not believe the buyer in the first instance had the ability to complete the contract so I think in the first instance – I am going to try and answer your question – so in the first instance I think that the assumption would be that the buyer has the ability to complete the contract and in which case the revenue and profits would be recognised in accordance with the method. If at some time during that contract it transpired that the buyer no longer had the ability to pay then at that stage an assessment of entire value of the recoverable amount of those assets would have to be made in accordance with general accounting practice and care of assets. I think it is very unlikely at day one of a contract you would come to the conclusion that the buyer doesn't have the ability to satisfy the obligations because I think commercial companies don't turn to that sort of contract. 230 The defendant gave evidence that provision may need to be made in a case where there is sufficient doubt with respect to performance under the contract. The evidence establishes that as at March 1995 both the plaintiffs and the defendant were optimistic that the Russian Contract was going to be successful and that money would be received under it. The defendant gave evidence that there were a number of "hiccups" at that stage, but he expressed the view there was nothing that he believed was going to put the contract "off the rails". 70 The primary judge expressed the following conclusions concerning the meaning of cl.10(a) of AASB 1009: 235 There was some debate about what the term "reliably estimated" in AASB 1009 meant. The verb "estimate" is defined as "roughly calculate or judge the value, number, quantity, or extent of" the relevant matter: The New Oxford Dictionary of English, Clarendon Press. Oxford 1998. When the word "reliably", is combined with the word "estimated" in AASB 1009, I am satisfied that the plain meaning is that the judgments made in respect of the revenues and costs could be relied upon. In other words they were not mere guesstimates but have some reasonable basis. 236 Although Mr Shanahan made the above dissection and analysis for other purposes, it is clear that this exercise demonstrates that: (a) total contract revenues to be received could be reliably estimated and (b) the costs to complete the contract could be reliably estimated. Having regard to the fact that the contract was to be performed in Stages and the evidence of Mr Shanahan above it is also clear that (c) the stage of contract completion could be reliably determined. This evidence and the evidence referred to below in relation to the costs of the individual cellswitches also establishes that (d) the costs attributable to the contract to a particular date could be clearly identified and compared with prior estimates. Once those conditions were satisfied there was a requirement to apply the percentage of completion method for the purpose of bringing profits on the Russian Contract to account. On this analysis and evidence the utilisation of the earned value method seems to me to have been appropriate, however the plaintiffs submitted that there were other matters, including a claim that the defendant's evidence was not credible, that should persuade me that it was not appropriate to utilise the earned value method. I will now deal with those other matters. 71 The primary judge then considered and rejected attacks on Mr. Seaton's credibility, and the conflicting evidence given by the appellants' expert Mr. Shanahan and the respondents' expert Mr. Robertson. 72 The primary judge then reached the following conclusions: 264 The question for decision is whether a reasonably competent auditor would not have consented to the inclusion of an unqualified audit opinion in the Prospectus in light of the way in which profit on the Russian Contract had been brought to account in the half year to 31 December 1994 Accounts. … 266 Mr Shanahan's evidence ultimately supported the defendants' case. The evidence, including that of Mr Shanahan, established that the pre-requisites of: contract revenues to be received being able to be reliably estimated; costs to complete the contract being able to be reliably estimated; the stage of contract completion being able to be reliably determined; and costs attributable to the contract being clearly identified and capable of comparison with prior estimates, were all able to be satisfied. Once those pre-requisites were established the Standard provided that profit "shall" be brought to account in accordance with the percentage of completion method. I am satisfied that the use of this method was available for use in respect of the Russian Contract by the Group. 73 As regards the appellants' claim based on misleading conduct, the primary judge said this: 297 As I have said earlier this aspect of the plaintiffs' claim against the defendants was dependent upon the plaintiffs establishing the matters under the Consent Claim. The plaintiffs failed in respect of each of those matters. There has been no case run or submissions made that are independent of those claims and accordingly the plaintiffs' 995 Claim also fails. 74 Turning to the appellants' claim based on the audit of the accounts for the year ended 30 June 1995, the appellants' final submission before the primary judge was relevantly to the effect that profits from the Russian and Argentinean contracts should not have been included in those accounts because the earned-value basis in AASB 1009 was not applicable, and because loss was foreseeable on the Russian contract at least. 75 The primary judge referred to the fact that Mr. Shanahan had given evidence only in the most general terms on these matters, and continued: 320 I have found that the defendant did not fail in his duty and did not breach his contract by allowing his audit opinion to be included in the Prospectus when the Accounts included profit recognition on the Russian Contract pursuant to AASB 1009 applying the earned value basis. The real questions for decision on this aspect of the plaintiffs' claim are (1) whether a loss should have been brought to account on the Russian Contract in the 30 June 1995 accounts; and (2) whether the Argentinean Contract profit should have been included in the 1995 accounts. If a loss on the Russian contract should have been brought to account and/or the profit from the Argentinean contract excluded from the accounts, then the defendants owed Pacific a duty not to sign the accounts in the form that they were signed with Note 7. 321 In my view the plaintiffs' case has insurmountable evidentiary difficulties. There is no expert opinion expressed as to why a competent and diligent auditor should have formed the view that there should have been a foreseeable material loss as at 26 September 1995 when the audit opinion was signed. Certainly there are facts that demonstrate that Techin Trade was a debtor to the tune of $5.7 million but it is not for the Court to conclude on that fact that there was a foreseeable loss. There is also the subsequent decision of the Board to change the accounting policy in respect of the telecommunications contracts but that is not a proper basis for the Court to conclude that the auditors should have concluded that a foreseeable loss should have been brought to account as at 30 June 1995. 322 The plaintiffs made a forensic decision to call no expert opinion on this aspect of the matter, other than that to which I have referred above, and chose to rely upon the cross-examination of the defendant. Having obtained the evidence that not only the defendant but also the company did not foresee a loss at the relevant time, the plaintiffs submitted that the evidence was "not credible". 76 The primary judge then discussed aspects of the appellants' attack on Mr. Seaton's credibility, and also referred to a submission that the fact that Mr. Seaton required note 7 to be included in the accounts and required the letter from the directors, referred to above, supported the contention that he foresaw a loss on the Russian contract. The primary judge then continued: 330 The rendition of the facts in this Note is not equivalent to the test in AASB 1009 that a "material loss" was foreseeable (cl .20). It may be that one might suspect that a person reading this material might have their doubts as to whether some loss might be foreseeable on the contract but what was required to be brought to account as soon as it was foreseeable was a "material" loss. Similarly the fact that the directors wrote the letter at the defendant's request does not establish that the defendant foresaw a "material loss" at the time. It may be concluded that the defendant wanted the directors to ensure that the technical and other difficulties that had been experienced would not further impede the performance of the contract having regard to the fact that time had passed with no further payment, but in my view the evidence is not such as to render the defendant's statement in his oral evidence that neither he nor the Company foresaw the relevant loss, as lacking in credibility. 331 I accept the defendant's evidence that he and the Company did not foresee a loss at that time. The next question would have been – was that view one that was available to the reasonable and diligent auditor on all the facts as they presented at that time? The plaintiffs' evidence does not address this question. Mr Shanahan's evidence, being the only evidence to address this aspect of the matter in only a general way, does not assist. The evidentiary difficulties of the plaintiffs are, as I have said, insurmountable. 332 The same difficulties apply to the claim that the profit on the Argentinean Contract should not have been brought to account. No witness for the plaintiff addressed the details of the contract, the nature of the contract, or the expectation in respect of what a competent and diligent auditor should have done in relation to the profit on this contract in the 30 June 1995 accounts. The only evidence was that of Mr Shanahan referred to earlier in the two paragraphs as extracted. There is certainly nothing in the letter of 8 December 1995 that supports the plaintiffs' claims that the defendants were negligent or in breach of their contract. 77 The primary judge then rejected the claim in relation to the Argentinean contract, and in accordance with her reasons dismissed the appellants' summons. ISSUES ON APPEAL 78 I will consider in turn the following issues raised in this appeal: 1. Construction of AASB 1009. 2. Construction of the Russian contract 3. Breach of duty in relation to the prospectus consent, involving three sub-issues, namely the extent of any duty, recognition of $12.8 million revenue and $6.4 million profit from the Russian contract, and the absence of a note concerning adoption of the going concern basis for the accounts. 4. Misleading conduct in relation to the prospectus consent. 5. Causation and quantification of loss from the prospectus consent. 6. Breach of duty in relation to the audit of the accounts for the year ended 30 June 1995. 7. Causation of loss from that breach of duty. CONSTRUCTION OF AASB 1009 79 AASB 1009 is a standard which must be followed in preparation of accounts, even if this would in the absence of explanation cause the resulting financial statements not to give a true and fair view of the profit or loss and/or state of affairs of the company: see ss.298(1), 299(1) of the Law. If the considerations in clause .10 of that standard are satisfied in the case of construction contracts, the method of recognition of revenue that it prescribes is mandatory; while if those conditions are not satisfied, this method is impermissible. An issue in this appeal is whether or not the condition in clause 10(a) ("total revenues to be received can be reliably estimated") was satisfied at relevant times in the case of the Russian and Argentinean contracts. If it was not, then the profits from those contracts should not have been recognised in the relevant financial statements. 80 On the other hand, if that condition was satisfied, there was no issue raised by the appellants as to the proportion of revenue and profits recognised in each case. However, the appellants did make the general allegation that the financial statements did not give a true and fair view of the profit or loss and/or state of affairs of the company; and to that extent, there was an issue as to whether further information or explanation was required under s.299(1). I will consider that matter further when I consider the questions of breach of duty and misleading conduct. Submissions 81 Mr. F. Douglas QC for the appellants submitted that the relevant condition was only satisfied if a judgment could be made that the total revenues in question would probably be received by the contractor, having regard to credit and performance risks. He submitted that this was indicated by the use of the word "received", by the purpose of standards to give rise to accounts that provide a true and fair view of the company's financial position, and by the criteria for recognition of revenue set out in SAC4. 82 Mr. I. Jackman SC for the respondents submitted that the reference to revenues in clause .10(a) is to amounts of money payable under the relevant contract, and that is what has to be reliably estimated (meaning roughly calculated). Otherwise, he submitted, there would be an anomaly between clause .10 and clause .11, which provided for cost plus contracts, and in which there were no words which could possibly accommodate credit and performance risks. He submitted that this interpretation did not defeat the purpose of presentation of a true and fair view of the company's position, because credit and performance risks can be dealt with in the separate exercise of making provisions or bringing losses to account, or making provision for losses in accordance with clause .20 of AASB 1009. Mr. Jackman submitted there was no support in the appellants' evidence, particularly that of Mr. Shanahan, to the relevance of SAC4; and the respondents' expert Mr. Robertson confirmed that the place of statements of accounting concepts was to assist in framing accounting standards, and was of minimal relevance in construing or applying the standards, and then only where the standards themselves gave no guidance. He submitted that his construction was confirmed by the circumstance that AASB 1009 was subsequently amended in 1997, with the provisions of clauses .10 and .11 being replaced by the following clauses 7.1, 7.2 and 7.3: 7.1 Subject to paragraph 7.4, where the outcome of a construction contract can be estimated reliably, revenue and expenses arising from the contract must be recognised in the profit and loss account by reference to the stage of completion of the contract as at reporting date. 7.2 The outcome of a fixed price contract can be estimated reliably when, and only when, all of the following conditions are satisfied: (a) total contract revenue can be measured reliably (b) it is probable that the economic benefits arising from the contract will flow to the contractor (c) both the contract costs to complete the contract and the stage of contract completion as at the reporting date can be measured reliably (d) costs related to the contract can be clearly identified and measured reliably so that actual costs arising from the contract can be compared with prior estimates. 7.3 The outcome of a cost plus contract can be estimated reliably when, and only when, both of the following conditions are satisfied: (a) it is probable that the economic benefits arising from the contract will flow to the contractor (b) costs related to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably. Decision 83 In my opinion, the appellant's construction is correct. 84 I do not place significant weight on SAC4: it has no statutory force, and cannot influence the construction of the statutory instrument AASB 1009, except possibly to the extent that it can be taken as reflecting the general understanding of accountants as to the use of language. Even this is doubtful, because SAC4 was not issued until 1992, whereas AASB 1009 issued in 1986. 85 However, in my opinion the appellants' contention is supported by the language of AASB 1009, and the purpose of presentation of a true and fair view of the company's financial position. 86 The word "received" suggests that it is a question of actual receipt or benefit to the contractor which is to be addressed, and the word "estimated" points to a judgment about what is probably going to happen rather than a mere transposition from the words of the contract itself, or calculation where the contract is for unit prices. It is true that there are no words in clause .11 that could possibly accommodate performance and credit risks; but I do not think that this is sufficient to justify ignoring or straining the meaning of the words used in clause .10. It is also true that the 1997 amendments clearly provided for consideration of the probability of benefits flowing to the contractor (and thus for regard to be had to credit and performance risks); but in my opinion this merely clarified the requirements of clause .10 and brought the requirements of clause .11 substantially into line with them. 87 I would add that different parts of the commentary in AASB point to different directions. For example, the words in par.(i) "when progress on the construction contract permits the outcome of the contract to be reliably estimated" supports the appellants' contention; whereas the words in par.(xiv) "when there is reasonable assurance that the criteria specified in the contract have been met" support the respondents' contention. On balance, the indications from the commentary do not, in my opinion, affect the issue. 88 It is true that the purpose of presentation of a true and fair view can, on the respondents' contention, be met by making appropriate provisions. Where, as in this case, recognition of profits has been reflected in the balance sheet by debts (where invoices have been rendered) and by work in progress (where invoices have not been rendered), there could need to be provision both against debts and against work in progress, in cases where it is not probable that the revenues or benefits in question will in fact flow to the contractor. However, it seems to me odd that one should be compelled to recognise profits, only then to have to make provision against them. 89 In my opinion, this is a separate question from that of recognition of losses, referred to in clause .20. If it is not probable that certain revenues or benefits will flow to the company, then it would seem contrary to the purpose of presentation of a true and fair view that these revenues or benefits be fully reflected in the accounts, even if it is not probable that there will actually be a loss on the contract in question. That is, the requirement of clause .20 that losses be brought into account as soon as foreseeable is not of itself sufficient to prevent improbable benefits or profits being brought to account under clause .10. CONSTRUCTION OF RUSSIAN CONTRACT 90 The issue here is whether Attachment 9 to the contract meant that Electronics did not have an unqualified right to payment of the total price of $37 million, but only had a right that Techin use its best endeavours to pay from its receipts. Submissions 91 Mr. Douglas QC submitted that this was the effect of Attachment 9: Electronics had the right to suspend or cancel subsequent deliveries, and property did not pass until payment; but its right to payment as such was qualified and it otherwise had no means of enforcing payment. 92 Mr. Jackman QC submitted that paragraphs 1 and 4 of Attachment 9 established that Electronics had an unqualified right to be paid. Paragraph 2 did no more that provide additional support to performance by requiring Techin to use 70% of an identified fund for payment of Electronics. Decision 93 In my opinion, the respondents' submissions are correct. Paragraph 2 does not cut down Electronics' right to be paid: it does not purport to override paragraph 1, and it would be commercially strange if it did. CONSENT ISSUE: EXTENT OF DUTY 94 It is common ground that an auditor is not responsible for the preparation of financial statements, or for the selection and application of accounting policies. Rather the auditor's role is to give an independent opinion as to whether accounts are drawn up in accordance with applicable accounting standards and whether they represent a true and fair view of the company's financial position. 95 However, the respondents also contended that Mr. Seaton and PW were not acting as auditors in giving their consent in relation to the prospectus, but merely as independent accountants in connection with the preparation of a prospectus, in respect of which they owed no relevant duty to Pacific or Electronics. Submissions 96 Mr. Jackman submitted that the consent in question was required by s.1032 of the Law, and was not given pursuant to any contract. There was no duty of care owed to Pacific or Electronics to ensure that the audit opinion previously expressed was correct or to revisit that audit. At most, there was a duty that did not extend beyond what the respondents actually knew, and that was in any event owed to the recipients of the prospectus not to Pacific or Electronics. Decision 97 I accept that the respondents' obligation in relation to the giving of consent did not involve repeating the audit that had been completed on 16 March 1995, and did not involve investigation to the same extent as would an audit of accounts. However, I do not accept that the respondents did not have a duty to Pacific and Electronics, or that the duty extended only to what they actually knew. In my opinion, they had a duty to these companies to exercise reasonable skill and care in giving consent, inter alia with a view to avoiding exposure of Pacific (at least) to claims for misleading statements in the prospectus. 98 In particular, it was their duty to exercise reasonable skill and care in conducting the subsequent events review on 18 April 1995, in participating in the Due Diligence Committee and in giving the consent on 3 May 1995. However, the extent of the duty is to be assessed having regard to the circumstance that the accounts for the half year ended 30 December 1994 had been audited and given an unqualified certificate, and that there was no requirement to re-audit those accounts. CONSENT ISSUE: BREACH OF DUTY CONCERNING RUSSIAN CONTRACT 99 Here, the appellants' contention was that the requirement of clause 10(a) of AASB 1009 was not satisfied in respect of the Russian contract, and accordingly revenue of $12.8 million and profit of $6.4 million should not have been included in the accounts; and that the respondents should have appreciated this. Therefore, the appellants contended, the respondents should not have consented to the inclusion in the prospectus of their audit letter asserting that the accounts, which included those matters, were prepared in accordance with applicable accounting standards and gave a true and fair view of the financial position of the company. Submissions 100 As on all issues, lengthy and detailed written submissions were provided by both sides. The written submissions on this issue are of particular importance, so in addition to summarising the main submissions at this point in this judgment, I will attach those written submissions as an appendix to the internet version of the judgment. 101 The main thrust of the appellants' submissions was to the effect that the respondents knew or should have known that the total revenue to be received under the Russian contract could not be reliably estimated, because of uncertainty whether those revenues would ever be received by the appellants. In short, they submitted: (1) Even if Techin's legal liability to pay the contract price did not depend on its receipts from sales of Stanilite products, it was plain and was recognised by the respondents that its ability to pay the contract price depended upon its ability to generate revenue from those sales; and the discrepancy between cash flow forecasts and actual receipts (only the one payment of $270,000.00) showed that there was uncertainty about this. (2) The protection that might have been given from Techin's inability to pay by the grant of securities and insurance cover was not in place because Techin did not comply with its contractual obligation under cl.7.7 of the Russian contract to provide securities, and a condition precedent to the export insurance taken out with EFIC was not satisfied; and these deficiencies were brought to the attention of the Due Diligence Committee of which Mr. Seaton was a member. (3) Electronics had on 21 December 1994 suspended deliveries under the Russian contract, because of Techin's breach in failing to provide the security; and although Mr. Seaton became aware of this, he did not enquire whether this suspension was continuing in March 1995. (4) The gross discrepancies between cash flow forecasts and actual receipts, coupled with other adverse trading results, should have brought home the unreliability of estimations of receipts under the Russian contract. (5) There were technical difficulties with the equipment to be provided by Electronics, as for example shown by Mr. Chan's note in the subsequent events review on 18 April 1995 that no more terminals had been shipped because the system had failed certification, and there were personal and political difficulties between Techin and the Russian Telecom utility. (6) There were other difficulties for Techin, of which Mr. Seaton was aware, in that it owed money in the United States and was involved in a fee dispute with its lawyers. (7) The appellants had, to the knowledge of Mr. Seaton, undertaken to NAB that they would not spend more on the Russian contract that they received by way of cash receipts, thereby jeopardising their ability to perform the contract and receive revenues under it. 102 The respondents submitted that these submissions were not open to the appellants, because the Outline had limited its case to Stanilite's right to receive cash, as distinct from the likelihood of money being received. 103 The respondents also submitted that questions raised by the respondents at the relevant time about cash flow related only to the timing of cash receipts, not their ultimate receipt, and the evidence of the appellants' expert Mr. Shanahan went no further than that these matters "cast doubt" on whether total revenues under the Russian contract could be reliably estimated. 104 Mr. Jackman for the respondents submitted that while Mr. Seaton accepted that the circumstances that securities and export insurance was not perfected, that cash receipts had slipped behind predictions, that deliveries were suspended in December 1994, that there were technical difficulties installing the network (which Mr. Seaton understood to be minor), and that Techin had cash flow difficulties and was in dispute with its lawyers, were matters to be taken into account, he rejected that these circumstances meant that he was unable to reliably estimate revenues to be received under the Russian contract; and his evidence was accepted by the primary judge. 105 Mr. Jackman submitted that Mr. Shanahan's evidence only went so far as to say that the question whether the amount of the revenues could be reliably estimated was a much more difficult question. 106 As regards the NAB condition, Mr. Jackman submitted that this did not prevent Electronics making payments under existing contractual obligations, and it was applied flexibly by NAB; and in any event, it only applied until the equity moneys were received. Decision 107 It follows from my decision of the first two issues that, in my opinion, the primary judge was incorrect on her construction of clause 10(a) of AASB 1009, but correct on her construction of the contract. It also appears from my discussion of the first issue that there were substantial considerations favouring the construction of clause 10(a) adopted by Mr. Seaton and by the primary judge; and in my opinion, it cannot be said that such a construction is one that a reasonable auditor would not have adopted. It follows that I would not find any breach of duty by Mr. Seaton merely on the basis that he adopted a construction of AASB 1009 which I consider to be the wrong construction. On Mr. Seaton's construction of clause 10(a), the total revenues to be received under the Russian contract could be reliably estimated at $37 million, there being no need to consider credit and performance risks. 108 In my opinion also, there are insufficient reasons for questioning the primary judge's acceptance of Mr. Seaton as an honest witness, giving reliable testimony about his beliefs and opinions and reasons at the time of the events in question. 109 However, Mr. Seaton agreed to the effect that if, by reason of adoption of his construction of clause 10(a), the accounts would not give a true and fair view of the company's financial position because it was not probable that the amounts in question would actually be received, there would need to be provisions made in the accounts so as to rectify that position. Mr. Jackman submitted to the effect that it would be outside the issues raised in the Statement of Claim and particulars, and fought at the hearing, to consider whether, although it was not a breach of duty to adopt an objectively wrong construction of clause 10(a), there was a breach of duty in adopting that wrong construction but at the same time not requiring the appropriate provisions, in circumstances where accounts prepared on the basis of that wrong construction would not give a true and fair view of the company's financial position. In my opinion, that submission takes too narrow a view of the matters raised by the pleadings: see for example pars.21(c), 24A(a) and 27 of the Statement of Claim. I do not think the Outline can be used to confine the issues so as to exclude matters raised by the pleadings. 110 However, in circumstances where in giving consent and performing associated tasks the respondents did not have to repeat the audit completed on 16 March 1995, but merely had to exercise reasonable skill and care between that date and 3 May 1995 in deciding whether or not to give consent, I am not satisfied that Mr. Seaton and PW failed to exercise that reasonable skill and care. 111 It is true that as at 3 May 1995, Mr. Seaton was aware that, in breach of its contract and contrary to cash flow forecasts, Techin had made no payments under the Russian contract between 31 December 1994 and 23 March 1995; and that on 23 March 1995 the only payment made by Techin prior to 3 May 1995 was made, that is a payment of about $270,000.00. However, the circumstance that no payment had been made between 31 December 1994 and 16 March 1995 was a matter known at the time of the completed audit, and the circumstance that a payment was in fact made shortly after that time could be regarded as a positive indication. There was one other significant event between 16 March 1995 and 3 May 1995 that could be regarded as positive, namely the successful placement of shares to the value of about $11.5 million, which had occurred by about 2 May 1995. 112 On this aspect of the case, I do not think it necessary to go further into the details of the submissions. I will say more in connection with the misleading conduct issue. Suffice it to say that I am not satisfied that Mr. Seaton and PW failed to exercise due skill and care between 16 March 1995 and 3 May 1995, so as to make it negligent that they did not at the latter date come to a different view from the view held at the earlier date, namely that the accounts were in accordance with accounting standards and presented a true and fair view of the financial position of the company. CONSENT ISSUE: GOING CONCERN BASIS 113 The accounts for the half-year ended 30 June 1994 were drawn up on a going concern basis: otherwise, they would have shown a far less favourable picture. The appellants did not contend that they should not have been drawn up on this basis, but did contend that the respondents were in breach of duty in not insisting that there be included in the accounts a note setting out the mitigating circumstances on the basis of which the accounts were so prepared. The appellants also submitted that, in the absence of such a note, the audit opinion should have been qualified. 114 In this regard, the appellants relied on the Statement of Auditing Practice AUP7 entitled "Going Concern". Paragraph 11 of AUP7 at the relevant time provided as follows: 11. The auditor should be satisfied that it is appropriate, based on all reasonably foreseeable circumstances facing the entity during the relevant period, for management to prepare the financial report on the going concern basis. 115 AUP7 also refers to the definition of "going concern basis" in Australian Accounting Standard AAS6, in the following terms: "Going concern basis" means the accounting basis whereby in the preparation of the financial statements the reporting entity is viewed as a going concern; that is, in the absence of evidence to the contrary, the entity is expected to continue in operation without any intention or necessity to liquidate or to curtail significantly the scale of its operations. It was common ground that the relevant period in this case was the twelve months from 16 March 1995 to 16 March 1996. 116 The appellants also relied on para.28 of AUP7, which is as follows: 28. When consideration of mitigating factors, in particular management's plans, have had a significant effect upon the auditor in forming the opinion that the going concern basis is appropriate, the auditor should specifically consider the adequacy or the disclosure in the financial report of matters such as: (a) the principal conditions which initially caused the auditor to question the going concern basis including, as appropriate, management's evaluation of their significance and possible effects; and (b) management's plans and other mitigating factors, including as appropriate, relevant prospective financial information. If the disclosures considered necessary by the auditor are not made, the auditor should express a qualified opinion on the basis of the lack of disclosure. 117 The appellants' contention was that the accounts should have contained a note concerning mitigating factors to the effect of what was proposed by Mr. Seaton's letter prepared between 10 and 13 March 1995, referred to in [16] above. Submissions 118 Mr. Douglas submitted it was clear that the appellants could continue as a going concern only with support from NAB, and that this support was conditional on successful capital raising of $35 million. Further, Pacific was in breach of the terms of the NAB facility as at 31 December 1994; and although NAB by its letter of 15 March 1995 waived that breach, it was almost inevitable that Pacific would be in breach at the next reporting day 14 April 1995, and in any event, NAB only extended its facility to 28 April 1995. Accordingly, the facility expired five days before the prospectus was lodged, and was technically unapproved. In addition, as Mr. Seaton was aware, the appellants were as at 13 March 1995 holding back cheques amounting to $3 million, some of which were for moneys due in December 1994 and January and February 1995, because NAB's overdraft facility was insufficient to permit these cheques to be honoured; and on that day also, the audit committee was informed that the appellants would need an extra $1 million up to the end of March and that the situation would become tougher in April. 119 Mr. Douglas also submitted that Mr. Seaton, in his letter of 10-13 March and otherwise, indicated that there would be need to be a note explaining the going concern basis even if NAB waived the breaches. The primary judge should not have accepted Mr. Seaton's explanation that the position changed because he had not expected an unqualified waiver, as actually occurred. 120 Mr. Douglas also submitted that the going concern basis was dependent on the successful raising of $35 million, which could not go ahead without an unqualified audited opinion; and that the prospective investors should have been told that the company could only continue if they purchased the shares that were being offered. 121 Mr. Jackman submitted that the evidence did not support the conclusion that further breach was inevitable, or that any further breach actually occurred. The appellants' expert Mr. Shanahan went no further than asserting what he himself would have done, and there was no expert evidence led by the appellants as to what a reasonably competent auditor would have done by way of an explanatory note. In any event, he submitted, the dependence of the appellants on NAB and the breaches of the facility were disclosed in the prospectus, as set out above. Decision 122 The question whether the respondents were in breach of duty is to be assessed on the basis that they did not have to re-audit the accounts, so the question is whether they were negligent in not insisting, during the period 16 March 1995 to 3 May 1995, on the necessity of a note which had not been included in the audited accounts and/or qualifying their audit by reference to the necessity for such a note. In my opinion, it is also relevant that there was significant disclosure of the position concerning the NAB facility in the prospectus. Mr. Shanahan's evidence went to the position at the time of actual auditing of the accounts, as well as being directed to what he would have done. 123 In all these circumstances, I am not satisfied that a breach of duty has been shown in this regard. MISLEADING CONDUCT 124 The appellants' case was that, by consenting to the issue of a prospectus with an audit letter, the respondents engaged in misleading conduct in the making of a representation in the prospectus to the effect that, in the respondents' opinion, the accounts for the six months to 31 December 1994 were prepared in accordance with the provisions of the Corporations Law and so as to give a true and fair view of the appellants' financial position. Submissions 125 Mr. Douglas submitted that the representation amounted to a representation that the opinion was supported by reasonable grounds involving the application of the appropriate expertise: see RAIA Insurance Brokers Ltd. v. FAI General Insurance Co. Ltd. (1993) 41 FCR 164 at 172, 175; Thompson v. Ice Creameries of Australia Pty. Ltd. (1998) ATPR 41-611 at 40,693. He also relied on the broad view of misleading conduct taken in Demagogue Pty. Ltd. v. Ramensky (1992) 39 FCR 31; and on the submissions in relation to the prospectus consent issues. 126 Mr Jackman submitted that the representation went no further than a representation that the respondents had exercised reasonable skill and care in reaching that opinion: Heydon v. NRMA Ltd. [2000] NSWCA 374, 51 NSWLR 1, at [307] and [429]-[432]. For the reasons given in relation to the prospectus consent issue, it was not shown that they had no done so. Decision 127 I would not altogether exclude the possibility that a statement in a prospectus that, in an auditor's opinion, accounts were prepared in accordance with statutory requirements and gave a true and fair view of a company's financial position, might convey more than that the auditor had exercised reasonable skill and care: it is possible that such a statement might amount to an assertion of the fact, so that the auditor might have to defend a claim for misleading conduct by proving, in terms of s.1009 of the Law, that he or she had reasonable grounds to believe that the statement was not misleading. Such a case might possibly be distinguishable from that of the legal opinion of the lawyer given to another lawyer or to a client, as considered in Heydon. However, the case was not put that way by the appellants, so I need not consider it further. 128 As the case was put, the question is whether it was shown that the respondents did not exercise reasonable skill and care in reaching the relevant opinion. In my opinion, on the way the case was put, misleading conduct could be shown if it was proved that the respondents did not exercise skill and care either at the time of the audit itself, or at the time of giving consent. So far in this judgment, I have excluded the latter. I have not yet excluded the former, and I have suggested that a higher degree of skill and care is required for the actual auditing of accounts, as distinct from the giving of an opinion outside the audit process. On that basis, contrary to the view expressed by the primary judge and contrary to the respondents' submissions, in this case there could be liability for misleading conduct, even though no breach of duty concerning the prospectus consent was shown. 129 In order to decide whether it was proved that the respondents failed to exercise reasonable skill and care in giving their audit opinion, it is necessary to consider the submissions concerning the prospectus consent, but to apply them to the higher duty in relation to the audit of March 1995. 130 In my opinion, it is appropriate to give substantial weight to Mr. Seaton's evidence that, while the matters relied on by the appellants were matters to be taken into account, they gave him no concerns about revenue to be received under the Russian contract; and that he was optimistic that the Russian contract was going to be successful and that money would be received under it, and that there was nothing that he believed was going to put the contract off the rails. It is also relevant to have regard to the limited nature of Mr. Shanahan's evidence, to the effect that the matters relied on by the appellants made the question of whether revenue could be reliably estimated a much more difficult question. 131 In those circumstances, I do not think the matters relied on by the appellants, including the deficiencies in the provision of securities and export insurance, lack of cash receipts, suspension of deliveries, technical difficulties in installation, Techin's own problems and the NAB condition, even considered cumulatively, are sufficient to justify a finding that the respondents breached their duty of skill and care in not concluding that the accounts, prepared in accordance with their (incorrect but not negligent) understanding of AASB 1009, did not give a true and fair view of the financial position of Pacific or Electronics. 132 As regards an alleged breach of duty concerning the going concern basis of the accounts, in my opinion the primary judge's acceptance of Mr. Seaton's explanation of why he did not insist on what had been set out in the letter of 10 to 13 March 1995 must be taken into account in assessing whether a breach of a duty of skill and care was proved in relation to that matter. Having regard to that consideration, I am not satisfied that such a breach of duty was proved. CAUSATION AND QUANTIFICATION OF LOSS FROM CONSENT 133 The appellants' contention was that, if consent had not been given, there would have been no prospectus and no rights issue; and NAB would have taken action with the result that the appellants would have ceased trading by about 30 June 1995. Between that time and the winding up in May 1996, the appellants claimed, the appellants lost a further $28.235 million, so this is damage caused by the respondents' conduct. 134 Having regard to my decision on liability, the question of causation of damage does not arise; but it has been addressed in some detail, and I think it appropriate to express some views on it. 135 The respondents contended that the appellants had not proved that they would have ceased to trade by about 30 June 1995; that in fact they suffered no loss, because trading losses of $28.235 million were offset by $35 million received from the placement and rights issue; that in any event, any loss was not caused by the respondents' conduct; and finally, that the respondents should be excused under s.1318 of the Law. Submissions 136 Mr. Jackman made very extensive and detailed submissions to the effect that it was not shown that the fund raising would not have occurred, or that NAB would have appointed a receiver or that the receiver would have brought about the winding up of the appellants substantially earlier than in fact occurred. 137 Mr. Jackman submitted that damages could not be awarded to Electronics on the basis that it had been lent money by Pacific and then incurred losses. Pacific and Electronics could not increase the damages payable by playing off their separate identities: see Johnson v. Gore Wood & Co. [2002] 2 AC 1 at 61, 66-7; Pilmer v. Duke Group Ltd. [2001] HCA 31, 207 CLR 165, at [18]. 138 Mr. Jackman also submitted that any loss was caused by the appellants' trading, not by the respondents' conduct: see Alexander v. Cambridge Credit Corporation Ltd. (1987) 9 NSWLR 310 at 358-366 and 334-336; Galoo Ltd. v. Bright Grahame Murray [1995] 1 AllER 16 at 24-30; Bank of Credit & Commerce International (Overseas) Ltd. v. Price Waterhouse (Chancery Division, Laddie J, 24/3/98) at [36] and [65]-[66]; Harris Scarfe Ltd. v. Ernst & Young [2005] SASC 113 at [11]-[18] and [54]-[69]; Daniels v. Anderson (1995) 37 NSWLR 438 at 531-539. 139 Mr. Jackman also submitted that the respondents had acted honestly, and submitted to the effect that if their conduct did have any role in the causation of loss, it was so slight that they should be exonerated: see Daniels at 524-5. 140 Mr. Douglas submitted that Electronics was a separate legal entity which could claim, independently of Pacific, for loss caused to it: Pilmer at 178-9. This was not precluded by Johnson v. Gore Wood: cf. Gould v. Vaggelas (1985) 157 CLR 215. He submitted that the respondents plainly owed a distinct duty to Electronics, including a duty to protect it from its directors: cf. Daniels, Fortuna Seafoods Pty. Ltd. v. The Ship "Eternal Wind" [2005] QSC 004 at [9]. 141 Mr. Douglas submitted that causation was a question of fact, to be determined as a matter of common sense (Bennett v. Minister of Community Welfare (1992) 176 CLR 408); and that this case was distinguishable from Cambridge Credit, because there was more than "but for" causation (Sew Hoy & Sons Ltd. v. Coopers & Lybrand [1996] 1 NZLR 392). 142 As regards the misleading conduct case, Mr. Douglas submitted that damages could be recovered if they were caused "by" the misleading conduct, even if the person claiming damages was not misled by the conduct: see Janssen-Cylag Pty. Ltd. v. Pfizer Pty. Ltd. (1992) 37 FCR 526, Marks v. GIO Australia Holdings Ltd. (1998) 196 CLR 494 at 529, Alexander v. Perpetual Trustees WA Ltd. (2003) 216 CLR 109 at 156-7. Decision 143 In my opinion, if profit from the Russian contract had been excluded from the accounts for the half year ended 31 December 1994, or if the prospectus had made it clear that it should have been, so that the profit of $4.238 million was converted to a loss of over $2 million, the rights issue would not have gone ahead or else would have been unsuccessful. Although NAB later continued to advance money to support the appellants even though the performance of the appellants fell far short of expectations, in my opinion a failure of this magnitude would have been enough to cause NAB to withdraw support and to bring about a cessation of trading by about 30 June 1995. 144 However, if the only breach of duty or misrepresentation concerned the note about the going concern basis, the situation is far less clear, and I would not draw the relevant inference. 145 Mr. Jackman relied on a broad statement made by Lord Miller in Johnson v. Gore Wood, at 66-7: Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204) and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other. In principle, the company and the shareholder cannot together recover more than the shareholder would have recovered if he had carried on business in his own name instead of through the medium of a company. On the other hand, he is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company's funds and which the company would not have sustained itself. 146 In my opinion, that statement should not be given such a wide application as to deny the possibility of recovery to Electronics, even though it might be said that Pacific and Electronics together have not lost anything because of the receipt by Pacific of $35 million by way of subscription for shares. In my opinion, the separate position of Electronics can still be considered; although the receipt of the $35 million and the relationship of Pacific and Electronics may be relevant to the question of whether any breach or misleading conduct of the respondents was causative of the loss. 147 This is not a case where the directors were misled by auditors, as alleged in Sew Hoy. It is true that a significant part of the ultimate losses was from the Russian contract, the treatment of which was, on the hypothesis under consideration, the substance of the breach of duty. However, the losses did not arise because the directors knew less about the reality of that contract than did the auditors: the contrary was the case. It is therefore arguable that the only connection between the losses and any relevant breach of duty or misleading conduct of the respondents was that the opportunity for losses was given by the continued trading and the raising of the money, so that this case falls within the principles discussed by the majority in Cambridge Credit, and the loss was not a loss relevantly caused by any breach of duty or misleading conduct of the respondents. 148 On the other hand, the duty of care of auditors to a company does include a duty to protect the company from mistakes and other misconduct of directors; and it could be argued that the trading that caused the losses was due to mistakes of the directors in their approach to the Russian contract and other contracts of the very kind that the auditors, in breach of their duty, failed to detect and correct. On that basis, it could be said that there was more than "but for" causation, and that on a common sense basis the loss was caused by the auditor's conduct. 149 I am inclined to the view that causation was not shown, but in circumstances where a decision is not necessary and would in any event be on a view as to breach of duty or misleading conduct that would only be hypothetical, I think it best not to make a definite ruling on this matter. AUDIT OF JUNE 1995 ACCOUNTS 150 The appellants' case was to the effect that it was contrary to AASB 1009 that profit from the Russian and Argentinean contracts was included in the accounts for the year ended 30 June 1995, and also that AASB 1009 required that a loss be recorded in relation to the Russian contract in those accounts. 151 The primary judge held that her decision that there was no breach of duty (in relation to the prospectus consent) by reason of profit recognition on the Russian contract meant that only the questions of the inclusion of profit from the Argentinean contract and the recognition of loss on the Russian contract needed to be considered. However, in circumstances where I have held that, for inclusion of profit pursuant to AASB 1009, it was necessary to have regard to the probability that benefits would in fact flow, it is necessary for me to consider whether the appellants have shown that, as at 11 September 1995 and/or 26 September 1995, the respondents should have recognised that it was not probable that benefits under the Russian contract would flow to the company and acted accordingly. 152 It was submitted for the respondents that the appellants should not be permitted to rely on a claim that a loss should have been recorded in relation to the Russian contract, because this was not pleaded or particularised or referred to an expert's report, and was not raised below until the fifth and final day of the cross-examination of Mr. Seaton, to which objection was taken and which was justified on another basis. This point was then relied on in final submissions, and dealt with by the primary judge. 153 In my opinion, that contention should be upheld: the respondents did not have the opportunity to lead evidence dealing with the recognition of losses, and did not accept and contest that issue so as to bring the case within the principle applied in Leotta v. Public Transport Commission (NSW) (1976) 50 ALJR 666: see Maloney v. Commissioner for Railways (NSW) (1978) 52 ALJR 291, Water Board v. Moustakas (1987) 180 CLR 491. 154 However, in my opinion it is open to the appellants to rely on a claim that profits from the Russian contract should not have been included, on the true construction of AASB 1009, and that even if it was not unreasonable for the respondents to have adopted an incorrect construction of AASB 1009, they should not have certified that the accounts gave a true and fair view in the absence of provision against profits that were included on the basis of revenue which would not probably be received. That case fell within pars.46(1), 47, 48A(a)(c), 50 and 51 of the final version of the Statement of Claim, and was not abandoned. Submissions 155 Mr. Douglas submitted that, although Mr. Shanahan did not address at length the inappropriateness of recognising the profit from the Russian contract in the accounts for the year ended 30 June 1995, that position is a fortiori to that in relation to the half year ended 31 December 1994, as to which Mr. Shanahan did express an opinion. The situation only got far worse, as expressed in Note 7 in the accounts. The position was not assisted by the representations of the management in the letter of 26 September 1995, which itself was qualified by reference to the uncertainties disclosed in Note 7. The situation was in fact worse than was indicated in Note 7, in that the export insurance was subject to conditions that still had not been met, and the securities held from the purchaser were of little or no value, there being no basis to consider them as being worth more than of the order of $2 million. 156 In addition, Mr. Douglas relied on the concession made by the respondents' expert Mr. Robertson that the matters relied on by the appellants (set out above in connection with the prospectus consent concerning the Russian contract) were, as at late September 1995, "damning", albeit that this was qualified by his saying that he was not aware of other factors of which Mr. Seaton was aware. In this regard, the condition that expenditure on the Russian contract be restricted so as not to exceed total actual receipts from that contract had been re-imposed by NAB's letter of 2 August 1995. 157 Mr. Douglas also submitted that the profit from the Argentinean contract should not have been included, in circumstances where this contract was only signed on 27 June 1995, and where the appellants had insufficient cash to enable them to perform the contract on their part. 158 Mr. Jackman submitted that it was not shown that receipt of benefits from the Russian contract was not probable. Mr. Shanahan gave no evidence on this, there was evidence that it was reasonable to assume that the purchaser would perform the contract. Mr. Seaton's evidence that he did not expect a loss was accepted by the primary judge and this was a reasonable view. In relation to the export insurance, EFIC was still holding open satisfaction of its conditions, and negotiations with the Dresdner Bank for project finance was proceeding. 159 As regards the concession by Mr. Robertson, Mr. Jackman relied on the qualification, pointing out that one matter of which Mr. Seaton was aware, and Mr. Robertson was not, was that NAB was not insisting on compliance with a restriction on expenditure condition. 160 As regards the Argentinean contract, Mr. Jackman submitted there was no evidence on this from Mr. Shanahan, and that it was appropriate to assume it would be performed by the other party, particularly where it had satisfactorily performed a previous contract. It was reasonable to assume that the respondents' performance could be financed with the aid of the first $6 million under the contract, and in fact NAB committed $3 million of this to be used for the respondents' purposes. Decision 161 In my opinion, Mr. Jackman's submissions on the Argentinean contract should be accepted. Although it is prima facie extraordinary that a $10 million profit should be recognised three days after the contract was signed, when the actual supply of equipment under the contract had not commenced, no point was taken by the appellants about the proportion of the revenue or profit recognised. In view of the track record of the other party, and the prima facie availability of $6 million to be used towards performance of the contract, it is not shown that the respondents should have assessed the receipt of the full contract price as not being probable. I am not satisfied, even having regard to the more stringent cash flow situation that had arisen by September 1995, that the view taken by the respondents on this matter was unreasonable in September 1995. 162 As regards the Russian contract, the position is different. 163 The respondents knew or should have known that Note 7 to the accounts was inaccurate or at least misleading, in suggesting that guarantees and other security held were to the value of anything like $10 million (although this is said to be a "maximum value", the suggestion is that the value is of this order), and in suggesting the EFIC insurance was in place. The reality, of which the respondents were or should have been aware, was that Techin had provided little if any security and had in that respect been in breach of its contract ever since commencement of delivery, and that in consequence there was no EFIC insurance cover. They knew that, despite forecasts at the time of the contract that many millions of dollars would be received in late 1994 and early 1995, in breach of their contract Techin had paid only $270,000.00 and had made no payments whatsoever since 23 March 1995, and that over $5 million was owing. They had no reason to believe that Techin's difficulties in the USA had resolved, and they knew that technical difficulties with the project had still not been overcome. They knew that NAB was still requiring that expenditure on the contract not exceed cash receipts, albeit not insisting on that requirement, in circumstances where the expenditure had reached about $17 million (total revenue recognised, about $29 million, less profit recognised, about $11.8 million) and cash receipts were only $270,000.00. 164 In my opinion, as conceded by Mr. Robertson, these circumstances were damning; and I do not think an auditor, acting reasonably, could in those circumstances hold the view that actual amounts that would be received from the Russian contract could be reliably estimated. Accordingly, on what I consider to be the correct construction of clause 10(a) of AASB 1009, the method of profit recognition provided by AASB 1009 should not have been applied. 165 On the respondents' construction of AASB 1009, which I consider it was not unreasonable for them to hold, AASB 1009 would apply, but there would be a question whether provision would need to be made so as to ensure that the accounts gave a true and fair view; or at least whether some information and/or explanation should be added, as required by s.299(1) of the Law, to ensure that the accounts gave a true and fair view. 166 The effect of including revenue of about $28.7 million from the Russian contract in the accounts was the inclusion in the balance sheet of assets of about $23 million for work-in-progress and about $5.7 million for debts, where those values could be supported only on the assumption that $28.7 million would be received under a contract which, despite forecasts that more than that amount would already have been received, had in fact yielded $270,000.00, and which involved all the problems I have referred to. Whatever uncertainties there may be about the idea of a true and fair view of a company's state of affairs, in my opinion it could not reasonably be considered that inclusion of work-in-progress on the Russian contract at $23 million and debts on the Russian contract at $5.7 million, in those circumstances, was consistent with a true and fair view of the state of affairs of Electronics or its sole shareholder Pacific. 167 In those circumstances, in my opinion, if AASB 1009 is applied by reason of the respondents' construction of it, provision would have to be made against those assets so that they total no more than the amount that could reasonably be expected to be received under the Russian contract, plus what any work-in-progress which was not in the event applied to that contract might yield from other sources. That provision would in my opinion have eliminated the profit of $11.8 million. 168 If, contrary to that view, ss.298 and 299 of the Law were construed as precluding the making of such provision, in my opinion the information and/or explanation required to give a true and fair view would need to go so far as to say that, although the accounts include work-in-progress of $23 million and debts of $5.7 million, and $11.8 million profit, in relation to the Russian contract, a true and fair view would eliminate that profit and make corresponding reductions to the assets. 169 In my opinion, it was appropriate to accept Mr. Seaton's evidence that, in March 1995, he had no concerns about revenue to be received under the Russian contract, he was optimistic that this contract was going to be successful and that money would be received under it, and there was nothing that he believed was going to put the contract off the rails; and to accept that these were views that could be held by a reasonable auditor. However, in my opinion, by September 1995 no reasonable auditor could have held such views. By then, the contract was plainly "off the rails"; and no reasonable auditor could have taken the view that it was probable that an $11.8 million profit would be made through the receipt of a further $28.7 million under the contract; or indeed that it was probable that receipts would exceed the expenses already incurred of about $17 million. The appellants' expert evidence was not squarely directed to that conclusion, but it is supported by opinions expressed concerning the 31 December 1994 accounts; and in any event, a judgment about the likelihood of such payments being made is less a matter of auditor's expertise than of common sense, which is required of auditors. Nor, as a matter of common sense, do I think a reasonable auditor could have relied on the directors' letter of 26 September 1995, particularly in circumstances where the Note 7, to which it referred, contained the misleading statements about security and insurance. 170 Thus, in my opinion, on the respondents' construction of AASB 1009, an auditor acting reasonably would have required such modification to the accounts, whether by way of provisions or information or explanation, so as to make it clear that the inclusion of profits of $11.8 million on the Russian contract did not give a true and fair view of Electronics' profit for the relevant period, and that for a true and fair view the profit was nil; and so as to effect corresponding adjustments to the assets. 171 Accordingly, in my opinion it was a breach of Mr. Seaton's duty as auditor to give audit approval for the accounts as drafted. CAUSATION OF LOSS BY PAYMENT OF DIVIDEND 172 It was submitted by Mr. Jackman that, in order to present an optimistic view to the market and to keep faith with investors, Electronics would still have paid a dividend of $5.4 million to Pacific from its accumulated profits, and Pacific would have gone ahead and paid the dividend which it in fact paid. 173 In my opinion, it is unlikely in the extreme that Electronics would have declared a dividend when it had made a loss for the year in question (namely, the declared operating profit of $10.438 million, less $11.8 million); and unlikely in the extreme that NAB would have permitted payment by Pacific of $1.576 million in cash in those circumstances. 174 Accordingly, in my opinion, on the balance of probabilities the dividend would not have been paid, and in my opinion the payment was relevantly caused by the respondents' breach of duty. CONCLUSION 175 In those circumstances, in my opinion the appeal should be allowed, and there should be a judgment in favour of Pacific for $1.576 million, with some provision for interest. The appellants have failed on a large part of their case, and there will need to be submissions as to costs below and costs on appeal. I propose that the appellants be directed to bring in Short Minutes, so far as possible agreed to by the respondents, within 28 days, together with submissions on matters as to which there is not agreement. I would direct that the respondents provide submissions on those matters within a further 14 days, and that the appellants provide any submissions in reply within a further 7 days. 176 McCOLL JA: I have read Hodgson JA's draft judgment. I express no view as to the matters in paras [133] – [149] which, as his Honour points out, do not require decision in the circumstances. Save as to that matter I agree with His Honour's judgment. 177 BRYSON JA: I respectfully decline to join in the observations on causation made by Hodgson JA at paras [133] to [149]. The issue of causation is extremely complex and difficult and its outcome is very uncertain, and it is not necessary for decision that it should be decided. In all other respects I agree with Hodgson JA. ********** APPENDIX The appellants' submissions on the breach of duty concerning the Russian contract, in relation to the prospectus consent, are in paragraphs 106-159 of their written submissions as follows: There was considerable uncertainty as to whether revenues under the Russian Contract would ever be received by the appellants (ground 10(a)) 106. This is a conclusion which flows inexorably from the matters referred to below in grounds 10(b) to (i) and the matters in the following paragraphs. 107. On a proper construction of the Russian Contract, Stanilite Electronics was only entitled to have the purchaser use its best endeavours to pay it from receipts generated principally from the sale of terminals - see clause 7 "Payment" (CB, vol 2, 540 {BB 22/5553}) and Attachment 9 "Payment Procedures". (CB, vol 2, 586 {BB 22/5599}) Although Stanilite Electronics had a right to suspend or cancel subsequent deliveries, it did not have an unqualified right to payment, nor did it have any means of enforcing payment. (Note in particular XXn Mr Seaton tr. 574.10-50 {BkB 3/574E-U}; XXn Robertson tr. 933-940 {BkB 4/933-940}) 108. The respondents appreciated, at the time, that payment to Stanilite Electronics was dependent on the generation of revenues, principally from the sale of terminals. In their letter of 7 December 1994 (CB, vol 3, 740 {BB 22/5799}) to Stanilite Pacific's board, (128 See judgment at [41] {RB 102B-N}) the respondents commented on a cash flow which had been prepared for the NAB and stated (correctly) that "the receipt of these monies is dependent on the ability of the network operator, Techinfo, in which Techin Trade Ltd has a majority interest, to generate revenues principally from the sale of terminals to be supplied by Stanilite". (CB, vol 3, 740 {BB 22/5799}) The NAB was understandably concerned and by letter dated 13 December 1994 asked Stanilite Pacific's company secretary, Mr Peter Fowler, for a further cash flow: "based on the assumption that no funds are received from Russia and you cease supply and replacement stock. The reason for this is obvious as the revenue from Russia is dependent on the ability of Techinfo to generate sales of terminals within Russia." (CB, vol 3, 755 {BB 22/5834}) 109. The cross examination of Mr Seaton on the financial model attached to the Russian Contract (Attachment 11, at CB, vol 2, 592-595 {BB 22/5605-5608}; tr. 561-568 {BkB 3/561-568}) indicated, among other things, that it provided no certain foundation for the receipt of money either by Techin or Stanilite Electronics. Mr Seaton's evidence in relation to the terms of the contract was that he had no concerns about the revenues to be received under the Russian Contract, and that the reservations expressed in his letter of 7 December 1994 were solely as to the timing of those receipts. Whether a reasonable person in his position could have formed that view is a matter for the Court to determine. (See in particular XXn Mr Seaton tr. 569.05-570.20 {BkB 3/569D-570I} and note generally tr. 569-582.01 {BkB 3/569-582B}) 110. On 13 March 1995 in paragraph 2.2 of their letter of that date to Stanilite Pacific (Tab 3 of Exhibit J {BB 40/10548}) the respondents wrote: "Stanilite effectively funds the 'Russia Contract'. Stanilite's receipt of cash for the contract is dependent on Techin Trade Limited selling the terminals for the system." (See also tr. 686.05-.54 {BkB 3/686D-V}) 111. Mr Seaton agreed that if the equipment was not installed in Russia, no income could be generated under the agreement. (tr. 592.37-.40 {BkB 3/592P-Q}) As at 16 March 1995, only two cell switches had been installed. (See XXn Mr Seaton tr. 593.28-.32 {BkB 3/593L-N}) 112. The Court below found that Techin's legal liability to pay the contract price did not depend on sales of terminals. (Judgment at [221] {RB 199F-J}) Whether this is the correct construction (and the appellants submit to the contrary), it cannot be doubted that Techin's ability to pay the contract price was dependent on sale of terminals. 113. Price Waterhouse's letter to Stanilite Pacific dated 13 March 1995 (Tab 3 of Exhibit J {BB 40/10548}) sets out the concerns that Mr Seaton had as to the bringing to account of $12.8m of revenue and $6.4m of profit on the Russian Contract. He agreed that he wanted to make it absolutely clear to the directors (Particularly the non-executive directors -see tr.695.30 {BkB 3/695M}) that the approach to the recognition of revenue from the Russian Contract was aggressive (75% of the profit was to be taken up on 33.5% of the sale value (tr. 695.54-.56 {BkB 3/695V-W})) and that there were credit risks and foreign exchange risks associated with it. (tr. 695.05-.31 {BkB 3/695C-M}) 114. The uncertainty which existed as to whether revenues under the Russian Contract would ever be received by the appellants is highlighted by the discrepancies which existed between cash flow forecasts brought into existence from December 1994 (in order, among other things, to support accommodation from the NAB) and the amount of US$204,000 (A$269,444.21) actually received prior to 3 May 1995. 115. If the appellants' submissions as to the correct construction of "revenues" in AASB 1009 is accepted, it follows that the respondents ought not to have given an unqualified audit opinion on accounts that included in the order of $6.4m of net revenue from the Russian Contract for the half year ended 31 December 1994. The criteria for recognition of revenue under SAC 4 were not met (ground 10(b)) 116. This flows from the conclusion in ground 10(a). Techin had failed to provide security under the Russian Contract (ground 10(c)) 117. Clause 7.7 of the Russian Contract (CB, vol 2, 541 {BB 22/5554}) provides that certain securities must be provided by Techin to Stanilite Electronics. Techin did not comply with these obligations. This was significant in itself because it deprived Stanilite Electronics of the security for payment which it was otherwise entitled to under the Russian Contract. 118. The breach by Techin of clause 7.7 had a consequential effect on the enforceability of the EFIC insurance cover, which Stanilite Electronics had arranged to protect itself against some of the risk associated with the Russian Contract. As the Prospectus states, (CB, vol 5, 1338 {BB 26/6915}) Stanilite Electronics had taken out EFIC export insurance for 60% of invoice amounts initially up to $7.4m. It was a condition of such insurance that all guarantees and securities nominated in the Russian Contract be in place by a date to be determined by EFIC. All of the guarantees and securities nominated in the Russian Contract were never in place. Accordingly the EFIC insurance was not available since at least one of the conditions remained unfulfilled. 119. Mr Seaton, and his colleague, Mr Chan, were members of the Due Diligence Committee and were privy to the contract summaries (including of the Russian Contract) prepared by Corrs for due diligence purposes. (CB, vol 4, 925, at 945 {BB 24/6276 at 6296}) Mr Seaton recalls reading them but does not recall precisely when although it would appear to have been some time in February/March 1995. (tr.666.16-.31 {BkB 3/666H-N}) Mr Seaton agrees that at least from the time he read this document he was aware that: (a) not necessarily all the guarantees which had to be provided to Stanilite Electronics under clause 7.7 had been provided; (tr. 666.33-.53 {BkB 3/666N-V} and see tr. 574.10-575.55 {BkB 3/574E-575W}) (b) Corrs had not reviewed EFIC insurance and expressed no opinions in relation to it; (tr. 667.14-.22 {BkB 3/667G-J}) and (c) Corrs were not prepared to express a view as to the enforceability of the retention of title clause. (tr. 667.42-.46 {BkB 3/667R-S}) 120. The breaches by Techin of clause 7.7 of the Russian Contract were the subject of further consideration by the Due Diligence Committee (including Mr Seaton (See tr. 622.36-622.48 {BkB 3/662P-T})) when it considered a facsimile from Corrs to Stanilite Pacific dated 31 March 1995, which attached an advice from US law firm Jones Day dated 29 March 1995 that outlined the deficiencies in the security given under the Russian Contract and the various breaches by Techin of clause 7.7. (CB, vol 4, 1129 {BB 25/6619}; see also judgment [86] {RB 129F-M}) The lack of security exposed Stanilite Electronics to considerable risk since it had incurred expenditures and recognized income which it had no reasonable expectation of receiving. Furthermore, as referred to above, until the security was provided in accordance with clause 7.7, the EFIC insurance remained conditional, as Mr Seaton appreciated, (tr. 621.25-.28 {BkB 3/621L-M}) and there was therefore no adequate insurance for the expenditure which had been incurred. The only advantage to Stanilite Electronics of the breach of clause 7.7 was an entitlement to terminate the contract or suspend deliveries for breach (which is what a receiver appointed in May 1995 would have done). If he had not appreciated this before, Mr Seaton knew from this time on that there were difficulties with security. (tr. 742.20-.23 {BkB 4/742I-J}) He regarded EFIC insurance as "one of the important securities". (tr. 743.20 {BkB 4/743I}) 121. The position as at 3 May 1995 is usefully summarized in the Prospectus lodged on that day, the relevant passage of which is set out at paragraph [103] of the judgment: ({RB 134M-1360}) [See par.[27] of this judgment] 122. As a member of the Due Diligence Committee, Mr Seaton was privy to drafts of the Prospectus from time to time and ought be taken to be aware of its contents. For example, on 21 March 1995, he attended a meeting of the Due Diligence Committee at which there was a discussion regarding a draft of the Prospectus. (CB, vol 4, 1099 {BB 25/6567}) Whether Mr Seaton appreciated it at that time, or whether he only became aware of it before 3 May 1995, he came to know that the EFIC insurance was conditional upon the security under the Russian Contract (See clause 7.7; CB, vol 5, 1338-1339 {BB 26/6915-6916} extracted in judgment at [103] {RB 134M-136N}) being provided (this was stated in the Prospectus and he had read drafts of it as part of his involvement in the due diligence process). (tr. 620.36-627.07 {BkB 3/620P-627E}) Stanilite Electronics had suspended deliveries under the Russian Contract by reason of Techin's breach in failing to provide security (ground 10(d)) 123. Prior to signing the audit opinion on 16 March 1995, Mr Seaton became aware when he or his staff reviewed the minutes of meetings of the Stanilite Pacific board that on 21 December 1994 (TB, vo128, 9244 {BB 23/5861}), Mr Fayle had advised that, until additional security satisfactory to the company was available, no further deliveries of equipment from Istanbul were being made. (tr. 591.04-.26 {BkB 3/591 C-L}) Mr Seaton agreed that if the equipment was not installed in Russia, no income could be generated under the Russian Contract. (tr. 592.37-.40 {BkB 3/592P-Q}) As at that time, only two cell switches had been installed. (See XXn Mr Seaton tr. 593.28-.32 {BkB 3/593L-N}) 124. Mr Seaton agreed that as at 31 December 1994, there were two cell switches which had been delivered to Russia and in respect of which invoices had been issued, eight units in Istanbul and twelve units in Perth in various stages of completion. (tr. 642.28-.35 {BkB 3/642L-O}) 125. In February or March 1995, Mr Seaton became aware of a finance report which had apparently been prepared for a board meeting of Stanilite Pacific to take place on 20 February 1995. (Exhibit K {BB 40/10595}; see also tr. 639ff {BkB 3/639ff}) Page 2 of Exhibit K states that: "Based on an earned value calculation prepared by David Wheatley we have brought $12.1m of revenue and $6.3m contribution to account for the period". 126. At a Stanilite Pacific meeting of directors on 1 March 1995, the results for the half year were tabled. (See the minutes at CB, vol 4, 963 at 964 {BB 24/6373 at 6374}) Mr Seaton did not raise with Mr Wheatley whether deliveries to Russia had still been suspended because of the failure to provide the securities promised under the Russian Contract. (tr. 654.34-.53 {BkB 3/6540-V}) Nor did he raise any questions with Mr Wheatley about whether Techin had provided the securities it was asked to provide under the Russian Contract. (tr. 654.55-.58 {BkB 3/654V-X}) There was a substantial discrepancy between actual and forecast receipts (ground 10(e)) 127. Cash flows were prepared from time to time by the appellants, principally for submission to the NAB. The respondents were required, on occasions, to comment upon, or give their imprimatur to, these cash flows. 128. The first "cash flow" associated with the Russian Contract was attached to the contract itself. Clause 7 of the Russian Contract provided for payment (CB, vol 2, 540 {BB 22/5553}) and referred to Attachment 9: "Payment Procedures". (CB, vol 2, 586 {BB 22/5599}) In turn Attachment 9 referred to the "Financing Model" in Attachment 11 (CB, vol 2, 592 {BB 22/5605}; see also the XXn of Mr Seaton on these attachments at tr. 561-568.30 {BkB 3/561-568M}) 129. The first post-Russian Contract cash flow is the one which was the subject of comment by Price Waterhouse in its letter of 7 December 1994. (CB, vol 3, 740 {BB 22/5799}) The most significant (and unrealistic) assumptions which underpinned that cash flow were that Techin would be able to repay its commitments in accordance with indicative revenue generation schedules contained within the Russian Contract (Attachment 11 {BB 22/5605-5608}; see above) and that it would be successful in generating sales of US$22.6m from the sales of terminals (hand-sets) in the period December 1994 to mid February 1995. (CB, vol 3, 744, para 11(ii) {BB 22/5803Q}) The improbability of the latter assumption being made out could readily be tested by simple arithmetic: it would require, say, 22,600 handsets to be sold for US$100 each in a period of about ten weeks (2,260 handsets per week). (Cf. [142] below) The respondents stated (as was the case) that "the receipt of these monies is dependent on the ability of the network operator, Techinfo, in which Techin has a majority interest, to generate revenues principally from the sale of terminals to be supplied by Stanilite". (CB, vol 3, 740 {BB 22/5799}) The respondents qualified the opinion they expressed in the letter dated 7 December 1994 by stating that they had been unable to assess Techinfo's ability to generate the revenue or to determine whether the assumption provided a reasonable basis for the forecast. (CB, vol 3, 741 {BB 22/5800}) These impediments to the receipt of monies under the Russian Contract are considered further below. 130. The cash flows entitled "Price Waterhouse Cash flow" (CB, vol 3, 760 {BB 23/5867} (which were not, according to Mr Seaton, prepared by Price Waterhouse - see tr.590.15-.31 {BkB 3/590H-N}; cf judgment at [36] {RB 99G-O})) show that $18.8m of revenue would be received in January 1995 and that $35m would be received in March 1995. (See judgment at [44] {RB 103E-W}) On this basis, a forecast was made that the Stanilite group would be cash flow positive in March 1995. Absent revenue from the Russian Contract, there was no possibility of this, and further cash would have been required from the NAB, or another financier for working capital, as the second variation of the cash flow shows (CB, vol 3, 761 {BB 23/5868}) which does not bring to account, at the NAB's request, revenue from the Russian Contract. 131. The cash flow attached to the respondents' report to Stanilite Pacific's directors dated 7 December 1994 (CB, vol 3, 749 at 751 {BB 22/5827}) shows revenue (defined in the footnote to the cash flow as "receipts banked") from the Russian Contract being received from December 1994. It also shows substantial expenditure (defined in the footnote to the cash flow as "payments made") under the Russian Contract, in order to generate the revenue. By letter dated 12 January 1995, the NAB required the appellants to give an undertaking that they would not spend more than they received under the Russian Contract (see ground 10(i) below) which necessarily affected the accuracy of this cash flow. The requirement appears to have been the result of the NAB's "grave misgivings" as to whether Techin would have received sufficient income to meet its payment obligations to Stanilite Electronics. (See judgment at [45] {RB 103W-104L}) 132. Further cash flows, which had been prepared by management and not reviewed by Price Waterhouse were tabled at a board meeting on 24 January 1995 (TB, vol 28, 9298-9299 {BB 23/6044-6045}; Mr Seaton was present at the meeting and both he and his assistant, Mr Chan, took notes CB, vol 28, 9296-9305C {BB 23/6044-6053}; XXn Mr Seaton tr. 596.55-605.10 {BkB 3/596W-605E}) and were provided to the NAB under cover of letter dated 25 January 1995. (See judgment [53] {RB 108K-X}; and CB, vol 3, 835 {BB 23/6109}) As Mr Seaton agreed, they differed markedly from the cash flow that had been attached to Price Waterhouse's letter to Stanilite Pacific dated 7 December 1994. (tr. 603.33-.45 {BkB 3/603N-S}) At least from this stage, Mr Seaton was aware that the "contract was running behind". (tr. 603.44-.45 {BkB 3/603R-S}) The cash flow showed that $1.8m would be received from Russia in February, and $7.9m in March 1995, and substantial amounts monthly thereafter. 133. The discrepancy between these cash flows and the earlier cash flows must have caused any reasonably competent auditor to question the reliability of such cash flows. Alternatively by 16 March or alternatively 3 May when only US$204,000 (A$269,444.21) had been received the reliability of those cash flows must have been a cause of concern to any reasonably competent auditor who was aware of this. 134. The consolidated trading results for February 1995 (CB, vol 4, 908 {BB 23/6082}) showed the operating loss for the month was $909,600, whereas it had been budgeted to be a profit of $2.156m. The operating profit for the year to date was $660,600, almost $5m worse than budget. This figure (of $660,600) took into account the $12.8m brought to account as revenue under the Russian Contract for the half year ended 31 December 1994 none of which had been received. A further $8m had been brought to account under the Russian Contract for the month of February 1995 alone, (CB, vol 4, 918 {BB 23/6092}) bringing the total revenue brought to account under the Russian Contract for the financial year to that date to $20.149m. (CB, vol 4, 918 {BB 23/6092}) 135. In his letter of 13 March 1995 to Stanilite Pacific, Mr Seaton noted that as at 9 March 1995, the Russian Contract had been invoiced to $4m and no money had been received. An amount of US$204,000 (A$269,444.21) was received on 23 March 1995. This was the only payment ever received under the Russian Contract. Mr Seaton became aware of the payment at about that time (tr. 739.37-.43 {BkB 4/7390-R}) and certainly by the time of the subsequent events review on 18 April 1995. (See judgment at [94] {RB 13IX-132E}) This payment was referred to in a note to the 30 June 1995 accounts. (See TB, vo131, 10360 {BB 28/7 467}) 136. On 5 April 1995, there was a meeting of the Due Diligence Committee (CB, vol 5, 1223 {BB 25/6682}) at which Mr Seaton was present, which was then adjourned to permit a meeting of the directors of Stanilite Pacific (See minutes at CB, vol 4, 1134 {BB 25/6624}) to occur. The consolidated trading results were tabled. (CB, vol 4, 1135 {BB 25/6625}) The results for the year to 31 March 1995 were a loss in the order of $900,000, a variation of $1.2m from budget, (CB, vol 4, 1135 {BB 25/6625}) notwithstanding the recognition of revenues and associated profits under the Russian Contract. 137. The directors of Stanilite Pacific, on 5 April 1995, resolved to include a statement in the Prospectus that: "Whilst the nature of much of the Company's business is such that it is difficult to accurately forecast short term financial performance, contracts already won and currently under negotiation should produce a profit for this financial year which will be higher than last year and also benefit the results for the coming year." (CB, vol 4, 1134 {BB 25/6624}) The Court ought draw the conclusion that Mr Seaton was aware from at least 5 April 1995 that any turnaround in the fortunes of Stanilite Pacific and Electronics before year end (30 June) was based on recognition of further earned value under the Russian Contract and the Argentinean Contract. (XXn Mr Seaton tr. 744.35-753.20 {BkB 4/7440-753I}) 138. The consolidated trading results for March 1995 (CB, vol 4, 969 {BB 24/6355}) told a different story from the interim results and ought not to have inspired confidence. The operating profit for the month was $448,700, whereas it had been budgeted to be a profit of $2.886m. The operating profit for the year to date was $962,100, over $7m worse than budget. (CB, vol 4, 970 {BB 24/6356}) This figure (of $962,100) took into account the $12.8m brought to account as revenue under the Russian Contract for the half year ended 31 December 1994. A further $4m had been brought to account under the Russian Contract for the month of March 1995 alone, (CB, vol 4, 979 {BB24/6365}) bringing the total revenue brought to account under the Russian Contract for the financial year to that date to $24.75m. The trading results for April 1995 were also parlous. (CB, vol 5, 1195 {BB 25/6647}) 139. Price Waterhouse saw the management accounts to March 1995 on 18 April 1995, if not before, as part of the subsequent events review. (See TB, vol 24, 7727ff {BB 25/6721}, extracted in judgment at [94] {RB 132B-E}) Mr Chan noted, by reference to an actual loss in the year to date of $921,200 (notwithstanding "aggressive" revenue recognition under the Russian Contract, amongst others) that: "Due to timing of revenue, especially from telecomm. [sic] Turnaround expected in the last quarter with expected realization of several prospects". (TB, vol 24, 7727£ {BB 33/8749}) Although Mr Chan did the work, he drew it to Mr Seaton's attention (tr.749.11-.13 {BkB 4/749E-F} (see also paragraph 56 of Mr Seaton's statement and tr. 750.53-751.46 {BkB 4/750U-751S})) The document must have caused concern, although Mr Seaton said that he does not recall being "seriously disturbed by it" (tr. 751.48 {BkB 4/751S-U}) Not only was the result to date a loss of $921,000 but also it had been budgeted to be a profit in the order of $7.2m. Furthermore, the results for the current month (March 1995) showed a loss of $2,364,200 (as opposed to a budgeted profit for the month of $2.886m). 140. Although Stanilite Electronics had, on 18 April 1995, expected to receive a further $800,000 under the Russian Contract by the end of April 1995, no more had been paid by 3 May 1995 (TB, vol 24, 7727N {BB 33/8758}; tr. 754.29-.37 {BkB 4/754L-O}) than the US$204,000 (A$269,444.21) received in March 1995. There were technical difficulties with the cell-switches to be provided under the Russian Contract (ground 10(f)) 141. The Due Diligence Committee met again on 6 March 1995. (CB, vol 4, 989 {BB 24/6396}; see also Mr Chan's notes at TB, vol 24, 7768 {BB 24/6391}; see XXn of Mr Seaton at tr. 660.49ff {BkB 3/660T ff}) A representative of the NAB attended as observer (See the NAB's report dated 14 March 1995, CB, vol 4, 994 {BB 24/6401}; partly reproduced in judgment at [68J {RB 116L-V}) There was a presentation in the course of the meeting concerning the Russian Contract. (CB, vol 4, 1002 {BB 24/6409}) Mr Chan' s notes concerning the Russian Contract (TB, vol 24, 7770 {BB 24/6393}) record that the approval of the Russian utility Post & Telecom (PTT) is required to get subscriber terminals and that this has been done (it appears that this was incorrect). See Mr Seaton's explanation of the note in the subsequent events review on 18 April 1995, in re-examination tr. 863.06-.16 {BkB 4/863D-H}) The meeting was told that there were 12 cell switches installed and 10 in Perth and that 1,500 subscribers were expected by the end of March and that the infrastructure could not cope. (TB, vol 24, 7770 {BB 24/6393}; tr. 661 {BkB 3/661}) The evidence as to the number and location of the cell-switches is not conclusive, nonetheless, a reasonably competent auditor would infer that there were significant difficulties in the performance on both sides of the contract. 142. Another difficulty of a technical nature was noted - greater design effort was required because of the old crossbar exchanges. Furthermore, there were difficulties with competition. Mr Chan's note records that Stanilite Electronics's system "fell over" and that there is a six-week delay on Stanilite Electronics's part. The NAB file note (Extracted in judgment at [68] {RB 116L-V}) records that although they "must have 3,000 connected by 1995 end", they are "currently limited to 1,500 users at this stage until 40 Cards (Integrated Switches) of US$2,000 each art [sic] installed at the PTTS." (Cf. the example postulated at [129] above, to make good the assumption which underpinned the cash flow) 143. As at 18 April 1995, no more terminals had been shipped because the system had failed certification. (Mr Chan's note of the subsequent events review on 18 April 1995 at TB, vol 24, 7727N {BB 33/8758} and tr. 754.48-.51 {BkB 4/754S-U}) Further, there were political and personality difficulties between Dr Bolotov, chief executive officer of Techin, and PTT, which were regarded as being more significant than the technical difficulties as at 18 April 1995. (tr. 863.03-.16 {BkB 4/863C-H}) Techin manifested cash flow problems (ground 10(g)) 144. At the Due Diligence Committee meeting on 6 March 1995, (CB, vol 4, 989 {BB 24/6396}; see also Mr Chan's notes at TB, vol 24, 7768 {BB 24/639]}; see XXn of Mr Seaton at tr. 660.49ff {BkB 3/660T ff}; see the NAB file note extracted in judgment at [68] {RB 116L-V}) it was said that Techin had cash flow difficulties and "owes money in the US". These difficulties, Mr Seaton said, were caused, at least in part, by Stanilite Electronics itself running behind schedule. (tr. 663.35-.39 {BkB 3/6630-Q}) This had ramifications for Stanilite Pacific because of the special undertaking it had made to the NAB (see Ground 10(i) below). There was a dispute between Techin and its US attorneys (ground 10(h)) 145. At, or some time prior to, the Due Diligence Committee meeting on 5 April 1995, the respondents became aware of a report from the US law firm Jones Day to Corrs, which principally concerned the failure by Techin to provide the security required by clause 7.7 of the Russian Contract. The report also referred to a fee dispute between Techin and its lawyers and the circumstance that Techin had retained no new lawyers since its previous lawyers had resigned. (CB, vol 4, 1131 {BB25/6621}) The appellants had undertaken to their principal financier, NAB, that they would not spend more on the Russian Contract than they received by way of cash receipts (ground 10(i)) 146. The Court below summarized the respective arguments concerning the effect of the undertaking in paragraphs [222] to [225] of the judgment. ({RB 199K-20IW}) The Court below summarized the evidence of Mr Robertson at paragraphs [226] to [227] of the judgment. ({RB 20IX-202V}) However, because the Court below regarded the likelihood that money would be received as irrelevant to the question whether amounts ought be brought to account as revenue, there was no determination of the effect of the undertaking. Accordingly it is necessary for this Court, if it upholds the interpretation of AASB 1009 for which the appellants contend, to consider the evidence adduced at trial, which is summarized below, and to make the requisite findings. 147. The letter from the NAB dated 12 January 1995 (Extract in judgment at [47] {RB 105J-N}) contained, in addition to the previous financial undertakings given by the appellants as part of the Facility Agreement entered into on 8 February 1994, (See judgment at [9] {RB 800- W}) a condition that Stanilite Pacific and Electronics give a special undertaking, namely: "That with regard to the Russian contract, the company will, from this day forward restrict expenditure in relation to that contract to not exceed total actual receipts of revenue from that same contract. This constraint is to continue until the equity monies are received when we would consider a review of the requirements in light of the circumstances then existing." 148. On 18 January 1995 the NAB sent a further letter of offer to Stanilite Pacific (CB, vol 3, 815 {BB 23/6020}) which made the timetable for the equity raising slightly longer to meet the company's concerns. Stanilite Pacific accepted the offer at a board meeting on 18 January 1995. (CB, vol 3, 820 {BB 23/6033}) 149. The Due Diligence Committee met for the first time on 30 January 1995. (See minutes at CB, vol 3, 830 {BB 23/6064} and Mr Seaton's notes of the meeting at TB, vol 28, 9329 {BB 23/6070}) 150. Following the Due Diligence Committee meeting, Mr Seaton made a file note regarding correspondence between Stanilite Pacific and the NAB, and he attached the correspondence to his file note. (TB, vol 28, 9330 {BB 23/6068} and tr. 606.48-.58 {BkB 3/606T-X}; 609.27ff {BkB 3/609L ff}) The first of the letters attached is that from the NAB to Stanilite Pacific dated 12 January 1995. The special undertaking relating to expenditure on the Russian Contract (set out above) was underlined by Mr Seaton. (See his admission, after having seen the original document on his audit file, at tr. 628.36-.43 {BkB 3/6280-R}) Mr Seaton agreed that, following receipt of the letter of 18 January 1995, the conditions in the letter of 12 January 1995, which had not specifically been altered, remained in force. (tr. 610.19-.23 {BkB 3/610I-J}) Although Mr Seaton was not prepared to agree that the letters of 12 January 1995 and 18 January 1995 contained the "unfavourable comments" to which he referred in his file note of the Due Diligence Committee of 30 January 1995. The practical effect of the special (tr. 613-614 {BkB 3/613-614}) he agreed that one does not normally see examples of the language used by the NAB in its letter of 12 January 1995 (TB, vol 28, 9333 {BB 23/5994}) - "no excess will be permitted under any circumstances. If necessary cheques will be dishonoured if the limit is exceeded". (See tr. 614.36 {BkB 3/6140-S}) 151. Mr Seaton sought to minimize the effect of the special undertaking in the letter of 12 January 1995 by suggesting that "the majority of the money on the Russian Contract had probably been spent". (tr.615.32-33 {BkB 3/615N}) This is at odds with the cash flow forecasts. Mr Seaton suggested that the liability of Stanilite Pacific and Electronics may already have been incurred prior to the imposition of the special undertaking (tr.616.43-.47 {BkB 3/616R-T}) but later agreed that the cash flows set out that payments would be made for the ensuing months. (tr.617.06-.26 {BkB 3/617D-H}) At all events, Mr Seaton agreed that the effect of the special undertaking was that it prevented Stanilite Electronics from incurring further liabilities under the Russian Contract in excess of monies received, although he did not agree that the special undertaking restricted the payments that Stanilite Electronics was entitled to make. (tr. 618.20-.22 {BkB 3/618I-K}) The practical effect of the special undertaking was, as Mr. Seaton agreed, (tr. 618.35ff {BkB 3/6180 ff}) that Stanilite Electronics could not ship cell switches to Russia, pay technicians to install equipment that was already in Russia or buy additional equipment. 152. Mr Seaton acknowledged that if revenue was to be received under the Russian Contract, Stanilite Electronics would have to spend money performing the Russian Contract. (See tr. 582.43-.53 {BkB 3/582R-V}) The corollary of Mr Seaton's acknowledgement is that if Stanilite Electronics was prevented from spending money on the performance of the Russian Contract then it could have no realistic hope of receiving revenue under the Russian Contract. Furthermore, the imposition of such an undertaking implied that the NAB was not prepared to continue to fund the Russian Contract and was sceptical (and justifiably so) that monies would ever be received under the Russian Contract for the very reason that had been explained to the NAB in Price Waterhouse's letter to Stanilite Pacific (for forwarding to the NAB) of 7 December 1994. (CB, vol 3, 740 {BB 22/5799) It ought be inferred that this was the reason for the imposition of the condition (see the NAB letter of 13 December 1994 (CB, vol 3, 755 {BB 22/5834})). 153. The NAB internal memorandum of 9 February 1995 shows that the special undertaking in the letter of 12 January 1995 remained intact, as far as the NAB was concerned ("the company remains well aware that their expenditure on this project is to be matched by income"). (TB, vol 28, 9356 {BB 23/6141}) 154. At a Stanilite Pacific board meeting on 1 March 1995, when the results for the half year were tabled, (See the minutes at CB, vol 4, 963 at 964 {BB 24/6373 at 6374}) Mr Seaton did not ask about the status of the special undertaking in the NAB's letter of 12 January 1995. (tr. 655.50-.57 {BkB 3/655U-V}) 155. Mr Seaton agreed that if Stanilite Electronics was proposing to install further systems in Russia, then Stanilite Pacific and Electronics could be in breach of the special undertaking required by the NAB on 12 January 1995, thereby exposing itself to the danger that the NAB would withdraw the temporary overdraft facility. (tr. 664.11-.26 {BkB 3/664F-L}) 156. The special undertaking to the NAB was problematic. If complied with, it jeopardized Stanilite Electronics's ability to perform the Russian Contract and therefore Stanilite Electronics's prospects of being paid. If not complied with, it gave to the NAB the power to call up the facilities if the NAB so chose. It is impossible to satisfactorily distinguish between failure to comply with the conditions and compliance with the ratios which caused Mr Seaton so much concern prior to 16 March 1995. (see [59] above) 157. Mr Robertson gave evidence that a reasonably competent auditor would not be able to achieve a confirmation from the NAB that it would not rely on the undertaking. (tr. 955.15-.23 {BkB 4/955G-J}) Mr Robertson also said that the auditor might have some confidence "that the condition would be washed away by the capital raising" (Judgment at [226] {RB 201 W-202P}) This boot-straps argument involves the same circularity as does the note as to going concern (as to which see above): the appellants could only continue as a going concern if there was a successful capital raising, and the appellants would only be released from their undertaking if there was a successful capital raising (although the latter did not come to pass - see submissions below concerning the financial statements for the year ended 30 June 1995). The readers of the financial statements were not, however, found by the Court below to be entitled to be informed of these matters. (although see [64] above and note the evidence of Mr Robertson at tr.954.40-.50 {BkB 4/954Q-U}) The observations of the High Court in Rogers v Whitaker (1995) 175 CLR 479, though, are equally applicable to the practice of accountants as the practice of ophthalmic surgeons. (Note also the obligation of an auditor to obtain sufficient appropriate audit evidence - see AUP 14 Statement of Auditing Practice: Audit Evidence, Exhibit 1 tab 24 {BB 41/10831} and AUP 25 Statement of Auditing Practice: Representations by Management, Exhibit 1 tab 25 {BB 41/l0834}) The respondent's expert, Mr Robertson, having admitted that the foregoing list was "damning" (see paragraph 241 of the judgment) qualified his admission by saying that he was not aware of other factors of which Mr Seaton was aware (grounds 10(j) and (k)) 158. Mr Robertson's evidence was to the effect that on the basis that each of the matters put to him was made out (as to which see the evidentiary references above, which substantiate each of the matters) the list was "damning" (See extract in judgment at [241] {RB 209J-N} and tr. 964-965 {BkB 4/964-965}) In other words, he agreed that if other matters did not ameliorate the matters listed above, he considered that it was not appropriate to bring revenue to account under the Russian Contract. When Mr Seaton himself was confronted with the same list of matters his stock standard response was that he never lost confidence that revenues would be received under the Russian Contract. Whilst this may have been his state of mind this could not have been the state of mind of a reasonably competent auditor confronted by such a list of issues . (XXn Mr Seaton tr. 836.50-837.10 {BkB 4/836T-837E}; tr. 783.35-.40 {BkB 4/783N-Q}, tr. 831.55 {BkB 4/831V-W}; tr. 690.45-.50 {BkB4/690R-U}; the trial judge's findings at [331] {RB 266M-R} do not appear to have considered this evidence although it is referred to elsewhere in the judgment at [241] {RB 209J-N}) 159. Mr Seaton, in the course of his cross-examination, did not refer to other matters. He was not re-examined as to any other matters. It has not been suggested that there were any other factors which affected the matters put to Mr Seaton and Mr Robertson, which the latter described as "damning". Blind confidence is not a substitute for reasoned decision making. The respondents' submissions on this issue are in paragraphs 172-211 of their written submissions as follows: (iv) Credit and performance risk - matters relevant to sales and payment 172. The appellants submit that, regardless of whether Techin's obligation to pay the contract price depended on sales of terminals, Techin's ability to pay was dependent upon the sale of terminals. From that point, it is then submitted by the appellants that Mr Seaton had concerns about whether Techin would be able to pay the contract price and that those concerns were such that total contract revenues could not be reliably estimated. 173. This matter falls outside the particulars given in paragraph 13 of the Outline which are concerned with Stanilite's "right to receive cash", not with the practical likelihood of actually being paid under the contract. Accordingly, it is irrelevant and should be disregarded at the outset. The following submissions are made only against the possibility that that primary submission is not accepted. 174. To begin with, and as already explained, even if Mr Seaton had held such concerns they were not relevant to clause .10 of AASB 1009. Concerns of that kind would need to be addressed in the context of provisioning and the application of clause .20 of AASB 1009. That aside, and in any event, the evidence does not establish that Mr Seaton was concerned or believed as at March or May 1995 that Techin would not be able to pay the contract price to Stanilite Electronics, and does not establish that Mr Seaton failed to behave as a reasonably competent auditor could have done. 7 December 1994 letter 175. A central plank in the appellants' case on this issue is a letter dated 7 December 1994 from Mr Seaton to the appellants [TB 1/423] {BB 22/5800}: see appellants' written submissions, [108]-[109], [129]-[132]. However, as was established at first instance, by its very terms that letter does not assist the appellants and is not relevant to the issue in the proceedings. 176. The analysis of the evidence with respect to this letter begins with the first report of Mr Shanahan, in which he approached the question whether total revenues to be received under the Russia contract could be reliably estimated with some timidity, and solely by reference to this letter of 7 December 1994. In paragraph 52 of his first report {BB 13/3286}, Mr Shanahan made reference to that letter and commented that its terms 'cast doubt' upon whether the total contract revenues to be received under the Russia contract could be reliably estimated [Shanahan, para 53 {BB 13/3287J]; and see Judgment, [213] {RB 1/191-192}. Mr Shanahan's evidence rose no higher than this query. 177. It is apparent from the face of the letter of 7 December 1994 that it was prepared by Price Waterhouse for the purpose of undertaking an independent review on the Stanilite group's forecast of timing of cash receipts and payments over a particular period: It was not concerned with estimating contract revenues under the Russia or any other contract. 178. Mr Seaton's evidence was that, having reviewed the cash flow forecast from the Russia contract in late 1994, he was not in a position to independently assess the reasonableness of the projected timing of the receipts. The receipts were the subject of monthly projections in the forecasts, and, as at 7 December 1994, Mr Seaton did not have the level of information that was required in order to assess whether the apportionment of receipts between particular months in the cash flow forecast was reasonable. One of the sources of cash flow - was payment under the Russia contract. For these reasons the Price Waterhouse letter said: 'We have been unable to independently assess Techinfo's ability to generate the revenues within the timeframes assumed and accordingly we are unable to determine whether the assumptions in respect of these receipts provide a reasonable basis for the forecast.' [Emphasis added.] [TB 1/423] {BB 22/5800} 179. The use of the words 'within the timeframes assumed' and 'receipts' in that letter makes it abundantly clear that Mr Seaton's qualification concerned only the timing of the receipts. It was not concerned to estimate revenues under the Russia contract. Mr Seaton makes this clear in paragraph 158 {BB 11/2833} of his statement. This was re-inforced during the course ofMr Seaton's cross-examination [Seaton, T569.39-570.11 {BkB 3/569.39- 570.11}, T572.43 {BkB 3/572.43}, T576.5 {BkB 3/576.5}]. The trial judge set out that evidence in the Judgment at [213]-[214] {RB 1/191-194}, without any criticism or disagreement with it. 13 March 1995 report to directors 180. The appellants submit that Mr Seaton's report to directors of 13 March 1995 set out concerns he had with respect to the bringing of revenue and profit on the Russia contract to account (para [113] of their written submissions). That submission is made without any regard to Mr Seaton's and Mr Robertson's evidence as to the purpose of that and other similar reports to directors, and is a good example of the appellants' misuse of such reports in an attempt to fill the evidentiary gaps in their case (as to which see paragraphs 50-53 above). Mr Seaton's evidence, as described at various points during these submissions, was that he did not have concerns about bringing revenue and profit on the Russia contract to account. Other circumstances 181. The 7 December 1994 letter and 13 March 1995 report to directors aside, the appellants also submit that Mr Seaton had knowledge of various matters concerning the potential to be paid or recover payments due under the Russia contract, and that by reason of his knowledge of those matters revenues could not be reliably estimated. Those factors were as follows: (a) guarantees and charges to be provided by Techin under the Russia contract, and export insurance to be provided by EFIC, both designed to secure payment of moneys to Stanilite, had not been perfected [Seaton, T621.20-37 {BkB 3/621.20- 37}, T666- 7 {BkB 3/666- 7}; CB 4/945 {BB 24/6197}]; (b) the actual cash receipts under the Russia contract had, by early 1995, slipped behind what had been scheduled in the Russia contract (Attachment 11) and previously forecast by Stanilite [Seaton, T625.35] {BkB 3/625.35}; (c) Stanilite had suspended deliveries of product to Russia in December 1995 because of a failure by Techin to provide the appropriate security [Seaton, T654 {BkB 3/654}, T667.2 {BkB 3/667.2}]; (d) Stanilite was experiencing technical difficulties in installing the network. Mr Seaton understood these difficulties to be minor, and typical of the sorts of difficulties experienced in the early stages of contracts of this kind [Seaton, T662.38 {BkB 3/662.38}; TB 24/7770 {BB 24/6393}]; (e) Techin was experiencing some cash flow problems [TB 24/7770] {BB 24/6393}. As Mr Seaton understood it, those problems were caused in part by Stanilite not having successfully installed the network, and in part by problems at Techin's end associated with obtaining a licence from the local authorities, so that Techin could make sales to subscribers [Seaton, T663.38 {BkB 3/663.38}, T664.7 {BkB 3/664.7}, T672.36 {BkB 3/672.36}]; (f) Techin was in dispute with its US lawyers with respect to payment of their accounts [CB4/1158 {BB 25/6619}; TB24/7770.8 {BB 24/6393}]; (g) Stanilite's lawyers had not been able to assure it that the retention of title provisions in the Russia contract could be enforced in Russia [CB 4/945] {BB 24/6197}. 182. It was put to Mr Seaton, and accepted by him, that these were all matters to be taken into account by an auditor in determining whether the entity has a claim against an external party which was "likely to be satisfied" [Seaton, T670.29 {BkB 3/670.29}]; Judgment, [228] {RB 1/202-203}. That is not controversial, and is an entirely separate question from whether they are matters relevant to the determination of whether revenues can be reliably estimated and ought, therefore, to be recognised pursuant to AASB 1009. The trial judge accepted that submission at [228] {RB 1/202-203}. 183. Mr Seaton rejected the suggestion put to him that he was unable to reliably estimate revenues to be received by Stanilite under the Russia contract by reason of any of the above matters [Seaton, T579.34] {BkB 3/579.34}, and stated that: "I had no concerns at all about the revenues to be received under the Stanilite contract. I thought it was reasonably clear and set out in the contract, and the revenues to be received were $28 million US." [Seaton, T579.24.] {BkB 3/579.24} 184. The trial judge accepted Mr Seaton's evidence, in making the following finding at [230] {RB 1/204}: "The evidence establishes that as at March 1995 both the plaintiffs and the defendant were optimistic that the Russian Contract was going to be successful and that money would be received under it. The defendant gave evidence that there were a number of "hiccups" at that stage, but he expressed the view that there was nothing that he believed was going to put the contract 'off the rails'." [Seaton, T832] {B.kB 4/832} Mr Shanahan's own evidence on the point 185. Mr Shanahan himself dealt with this issue in his statement in reply. He pointed to cash flow delays under the Russia contract and his understanding that 'Stanilite would only receive payment from Techin after Techin had received payment for the provision of terminals in Russia' (para 132) {BB 16/4034-5}, but he was not prepared to say that those facts meant that the condition in AASB 1009 concerning reliable estimation of contract revenues was not satisfied. The highest he put it was as follows: 'While it is clear that the quantum of maximum total revenue under the contract is clearly established, in my opinion whether the amount of those revenues that will be received can be reliably estimated is a much more difficult question.' [Emphasis in original.] (para 131) {DB 16/4034} 186. Mr Shanahan was therefore astute to distinguish between estimation of revenue under the Russia contract, on the one hand, and estimation of cash receipts, on the other. AASB 1009 is concerned with the former, not the latter; and Mr Shanahan conceded that the former was satisfied. 187. The trial judge referred to that evidence at [215] {RB 1/194} of the Judgment, and pointed out at [266] {RB 1/227-228} that Mr Shanahan's evidence ultimately supported Price Waterhouse's case. The latter finding was also based on Mr Shanahan's precise quantification and dissection of revenues referred to in the Judgment at [234] {RB 1/205-206} and [236] {RB 1/206}. Credit and performance risk - NAB conditions of 12.1.95 188. The appellants also continue to submit that a letter dated 12 January 1995 from the NAB to the appellants [TB 28/9331] {BB 23/5992} and the state of the Russia contract operated to prohibit Stanilite Electronics from performing its obligations under the contract, and that for this reason total revenues to be received could not be reliably estimated. 189. This also is a matter which falls outside the Outline provided by the appellants during their opening, which was intended to define the issues clearly. The appellants called no evidence in relation to it, and there was no scope for the appellants to advance a case beyond that which was pleaded and particularised in the Outline. Accordingly, the Court should treat this matter as irrelevant. If, however, that submission is not accepted then Price Waterhouse make the following submissions. 190. Again this is a matter of credit and performance risk that is not relevant to clause .10(a) of AASB 1009. That aside, on the facts of the case as described below, the terms of the letter did not give Mr Seaton (and would not have given a reasonably competent auditor) cause to take a different approach to the recognition of profit on the Russia contract. 191. In its letter of 12 January 1995, NAB set out, inter alia, a series of special undertakings it required Stanilite to honour during the life of the temporary facility. The first special undertaking read as follows: '[W]ith regard to the Russia contract, the company will, from this day forward, restrict expenditure in relation to that contract to not exceed total actual receipts of revenue from that same contract. This constraint is to continue until the equity monies are received when we would consider a review of the arrangement in the light of circumstances then existing.' 192. The position as at March 1995 was that, contrary to Stanilite's cash flow forecasts, relatively little money (namely US$204,000) had been received from Techin under the Russia contract. On this basis, the appellants put to Mr Seaton that the position as from 12 January 1995 was that, unless and until moneys were received from Techin, Stanilite could not continue to expend money on the Russia contract, and therefore could not hope to make further money on the Russia contract. 193. For reasons explained by Mr Seaton, that proposition is incorrect. 194. First, as Mr Seaton read and understood the NAB condition, the prohibition related to the incurring of further expenditure. It did not prevent Stanilite from paying expenses that it had incurred prior to 12 January 1995, and it was Mr Seaton's understanding that, by that date, Stanilite had already incurred the majority of its expenditure on the Russia contract [Seaton, T615.28 {BkB 3/615.28}, T615.53 {BkB 3/615.53}, T616.35 {BkB 3/616.35}, T616.45 {BkB 3/616.45}, T617.38-57 {BkB 3/617.38-57}, T618.20 {BkB 3/618.20}, T766.19 {BkB 4/766.19}]. Mr Seaton's understanding is confirmed by Stanilite's response to NAB of 13 January 1995, particularly para (ix) at TB 28/9345 {BB 23/6010} to the following effect: 'As previously advised to the bank, should revenue not flow as expected and required under the Russian contract, no further commitments will be made and equipment is recoverable with EFIC cover underwriting any losses'. In this respect, paragraph [151] of the appellants' written submissions misconstrues Mr Seaton's evidence. As is clear from the transcript references referred to above, when Mr Seaton spoke in his evidence of the majority of the money having been spent he was talking in terms of the expense having already been incurred. The fact that the incurred expenses were planned to be actually paid at some later date (as set out in cash flow forecasts) was not to the point. 195. Moreover, to construe the term 'expenditure' in NAB's letter as constraining Stanilite from making payments under existing contractual obligations would have involved NAB in unlawful interference with contractual relations -a result unlikely to have been intended by NAB. 196. In assessing the impact of the NAB condition, it should be remembered that there were two limbs to that condition. First, there was a restriction on expenditure save from actual receipts; and, secondly, that restriction was to continue until the equity monies were received. The cross-examination of Mr Seaton concentrated on the first limb and ignored the second. 197. In cross-examination on the first limb, Mr Seaton acknowledged that the strict effect of the 12 January 1995 special undertaking was that Stanilite could not ship further product to Russia, pay technicians to install the product, purchase additional equipment, or complete the construction of the partially built cellswitches unless and until either sufficient moneys were received from Techin or NAB gave its permission [Seaton, T618.35-619.30] {BkB 3/618.35-619.30}. There is no evidence of the quantum of these expenditures or their materiality. 198. The attitude of NAB with respect to this matter is therefore of significance. In that regard, Mr Seaton's evidence was that, whilst he did not know whether NAB had provided a formal written waiver of the special undertaking [Seaton, T763.9] {BkB 4/763.9}, he was aware that NAB was prepared for Stanilite to continue to do extra work on the contract, and extra work was done [Seaton, T619.34] {BkB 3/619.34}. In this respect, Mr Seaton stated that the matter had been discussed between NAB and Stanilite [Seaton, T655.52] {BkB 3/655.52} and NAB was well aware that work was continuing under the Russia contract notwithstanding payments had not been received [Seaton, T673.56] {BkB 3/673.56}. In fact, an NAB representative (namely the relationship manager, Mr Ferreira) was present at a meeting of the due diligence committee on 6 March 1995 at which Mr Wheatley of Stanilite gave a presentation about the Russia contract and the future activities to be undertaken by Stanilite under the contract [Seaton, T663.51 {BkB 3/663.51}, T674.3 {BkB 3/674.33}]. See also the following documents which indicate that NAB was aware, after 12 January 1995, that Stanilite was proceeding to complete the Russia contract: (a) Announcement to the Australian Stock Exchange on 3 March 1995 [TB2/831] {BB 24/637 L-N}. (b) Minutes of the due diligence committee of6 March 1995 [TB2/863] {BB 24/6396 N, 24/6397K}. (c) Notes of the due diligence committee of6 March 1995 [TB28/9397] {BB 24/6391J, 24/6393 R- T}. (d) NAB Report on business contact dated 14 March 1995 [TB5/1712] {BB 25/6474J-Q}. (e) Report on business contact dated 21 March 1995 [TB5/1721] {BB 25/6574}. (f) NAB Internal memorandum dated 2 May 1995 [TB 3/938] {BB 26/6859 S-T}. All of these documents post-date the 9 February 1995 NAB memorandum upon which the appellants rely (see [153] of the appellants' written submissions). 199. Mr Seaton explained that he had received management representations to the effect that NAB knew that Stanilite was continuing to push on with the Russia contract in 1995 because that was the best way of assisting Techin to realise cash to enable it to pay the moneys it owed Stanilite [Seaton, T763.56] {BkB 4/763.56}. It was Mr Seaton's understanding that NAB was keen to see the contract continue because to do otherwise would not be in the interests of Stanilite or NAB [Seaton, T785.9] {BkB 4/785.9}. For this reason NAB had effectively waived compliance with the special undertaking, or as Mr Seaton colloquially described it, 'everyone was turning a blind eye' [Seaton, T764.33] {BkB 4/764.33} and the NAB was 'living with it' [Seaton, T764.40] {BkB 4/764.40}. The trial judge implicitly accepted that evidence at [225] {RB 1/201}. Further, the trial judge accepted without criticism Mr Seaton's evidence to the effect that the bank was prepared for Stanilite to continue to do extra work on the contract and that extra work was done: Judgment [224] {RB 1/200-201}. 200. There are two further reasons why the special undertaking in the bank's letter of 12 January 1995 is of no significance for the purpose of this proceeding. First, the bank was entitled, under the facility agreement [TB4/1450] {BB 20/5070}, to declare the moneys to be immediately due and payable only if an event of default occurred [TB4/1468 {BB 20/5088 K-M}, clause 14.2]. Relevantly, an event of default occurred if: 'The Company does not comply with the undertakings in Schedule 3, or does not observe any other obligation under any Document and, if the non-observance can be remedied, does not remedy the non-observance within 14 days.' [Clause 14.1, TB4/1466] {BB 20/5086 Q}. 201. The undertakings in Schedule 3 are the financial undertakings breach of which was subject to the bank's waiver of 15 March 1995. If there was a breach of an obligation under a Document (being this letter of 12 January 1995) that breach was capable of remedy and an event of default does not arise until the expiry of 14 days notice by the bank to remedy the breach and the same remains unremedied. The bank gave no such notice: on the contrary, according to the evidence, it acquiesced in the breach (as the trial judge implicitly found at [225]) {RB 1/201}. Hence, no event of default arose and the bank could not have called up the moneys in the circumstances. 202. Further, the relevant date for assessment of the impact of the undertaking is, of course, 3 May 1995, for that was the date of the alleged act of negligence on Price Waterhouse's part by consenting to the inclusion of the 31 December 1994 audit opinion. Now, by 3 May 1995 the following things had occurred: (a) On 28 April 1995, Stanilite Pacific had, through BBY, successfully placed 7 million shares to institutional investors and raised $11.7 million; (b) On 2 May 1995, NAB consented to the Stanilite's group's using the amount so raised for the purposes of its operations and thereby waived the undertaking that the raising be used to reduce the overdraft facility; and (c) BBY and CS First Boston underwrote the issue of 14.5 million shares to raise $23.2 million, subject to standard terms and conditions. By 3 May 1995, therefore, the cash position of the Stanilite group had so fundamentally improved that the undertaking must be taken to have expired. 203. Mr Robertson's evidence in relation to this issue is important, and is referred to by the trial judge at [226]-[227] {RB 1/201-202}. His expert opinion is that a reasonably competent auditor would not be guided solely by the fact of the special undertaking to the NAB. Rather, a reasonably competent auditor considering the matter as at 3 May 1995 would be entitled to consider that, in light of the receipt of the placement funds and the activity surrounding the capital raising, the particular undertaking would be 'washed away by the capital raising' [Robertson, T952.20] {BkB 4/952.20}, and was therefore 'in [imminent] danger of being totally relaxed' [Robertson, T948.38] {BkB 4/948.38}. The appellants' contention that this is circular thinking and impermissible (see [157] of their written submissions) should be rejected as it is, in effect, a submission that the auditor should not have regard to a commercial circumstance relevant to the financial position of the company being audited. 204. Further, Mr Robertson stated that in deciding whether the undertaking was a concern from an audit perspective (whether at 3 May 1995 or at 16 March 1995) a reasonably competent auditor would be entitled to have regard to the way in which the relationship between NAB and Stanilite was being conducted [Robertson T949.19] {BkB 4/949.19} and any other relevant factors and information available to him or her [Robertson, T950.45 {BkB 4/950.45}, T952 {BkB 4/952}, T964.42 {BkB 4/964.42}]. For example, if the auditor perceived that NAB was turning a blind eye to any breaches of that undertaking, it would be easier for the auditor to conclude that 'the condition was there as a technicality rather than as a real live factor' [Robertson, T954.58] {BkB 4/954.58}. 205. Mr Robertson was asked whether the auditor would need to obtain formal confirmation from NAB that the undertaking would be waived. His evidence was that, in light of the receipt of the placement proceeds and the impending capital raising, it would not be necessary for the auditor to obtain such confirmation [Robertson, T948.47 {BkB 4/948.47}, T961.8 {BkB 4/961.8}]. The effect of Mr Robertson's evidence is that auditors would be likely to appreciate that, in the real world, a bank would be unlikely to surrender a covenant in its favour and any request for such a surrender would be futile [Robertson, T955.20) {BkB 4/955.20}, and that whether an auditor would need to make such a request would depend on the particular circumstances of the case and the way in which the relationship between NAB and the company was actually being conducted [Robertson, T979.27] {BkB 4/979.27}. 206. In seeking to undermine Mr Seaton's views on the likelihood of the capital raising proceeding and the effect that would have on the continued operation of NAB's letter of 12 January 1995, the appellants may take no comfort from the fact that the formal underwriting agreement with respect to the capital raising was not put in place until early May 1995. Mr Robertson's view was that an auditor could be in a position where he would have a range of information available to him upon which he could rely in determining whether the capital raising would proceed, notwithstanding that the formalities associated with the execution of the underwriting agreement had not been attended to [Robertson, T972.26 {BkB 4/972.26}, 973.26 {BkB 4/973.26}]. 207. In light of this evidence, the argument advanced by the appellants with respect to the effect of the 12 January 1995 letter from NAB is untenable. (v) Appellants' submission with respect to Mr Robertson's evidence 208. The appellants submit that the trial judge did not make enough of Mr Robertson's evidence that certain matters of performance and credit risk were "damning" (see [158] -[159] of their written submissions). 209. This submission fundamentally misstates the evidence of Mr Robertson and must be rejected. The cross-examination and evidence to which the appellants refer concerned matters relevant to the 1995 audit in late September 1995 [Robertson, T964] {BkB 4/964}. It is not, therefore, evidence directed to the provision of the 1994 audit letter in March 1995 or the giving of the consent on 3 May 1995. For example, the various matters identified in the question to which the relevant answer relates include an assessment of the actual payments received across the period from November 1994 to September 1995, and the fact that securities and EFIC insurance had not been effected by September 1995. It is not, therefore, possible to take Mr Robertson's answer as one applying as at March or May 1995. 210. In any event, Mr Robertson made it clear in his answer that in order to form a view on the question of how a reasonably competent auditor would have dealt with Russia contract revenues and profits in light of the matters to which he was taken, one would need to know precisely what factors and information were available to Mr Seaton. 211. One fact that Mr Robertson did not himself know was that NAB was not insisting on compliance with the terms of its 12 January 1995 letter. His evidence at T964 {BkB 4/964} must be read in this context. As noted above, when Mr Robertson was asked to assume the truth of that matter, his evidence was that it would be open to a reasonably competent auditor not to treat the terms of the 12 January 1995 letter as a "real live factor" and that in the assumed circumstances it would have been open to a reasonably competent auditor to allow revenues and profits on the Russia contract to be recognised [Robertson, T954-5] {BkB 4/954-5}. ********** 14/09/2005 - Correction to name of Counsel appearing on coversheet - Paragraph(s) coversheet 16/09/2005 - Amendment to headnote - Paragraph(s) heading DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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