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Court of Appeal Considers Review Engagement

Published in the February 2006 issue of Litigation Notes - View Article

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The Ontario Court of Appeal recently considered the duties of an accountant on a review engagement. Dr. Bernard Sherman was described by the court as “ an astute businessman, an experienced investor and the chair of Apotex Inc.” He invested in two limited partnerships formed to invest in luxury yachts. Albert Title, a partner with Orenstein & Partners (“Orenstein”), performed review engagements of the financial statements of the limited partnerships. Peter Browning, another partner in the firm, reviewed Title’s work and also did some accounting and tax work for the general partner, Overseas Credit and Guarantee corporation (“OCGC”).

The limited partnerships turned out to be a sham and Dr. Sherman was re-assessed by Revenue Canada. His partnership losses, interest expenses and other costs related to the limited partnerships were disallowed. He sued Orenstein, Title and Browning for twenty monthly interest payments totalling about $635,000. He claimed that a going concern note should have been included in the financial statements of the limited partnerships, which would have alerted him to the fact that they were not viable enterprises and caused him to stop making interest payments. His cased was dismissed by the Ontario Superior Court and he appealed to the Court of Appeal.

His appeal was dismissed. The Court of Appeal considered the standard of care required for a review engagement, including the principles enunciated in the case of Bloor Italian Gifts v Dixon, (2000) 48 O.R. (3d) 760 (C.A.). The Court held that a review engagement has a limited objective: the accountant must assess the information reported on against the standard of plausibility. Plausibility is a matter of professional judgment, although the accountant must have sufficient knowledge of the enterprise to be able to make intelligent enquiries. Unlike an audit, the accountant performing a review engagement does not undertake to verify the accuracy of the information provided, but is entitled to assume that the client is telling the truth. A review engagement is even less likely than an audit to detect fraud or error.

A going concern note is so serious that it requires a level of enquiry that is incompatible with a review engagement. In fact, the section of the CICA Handbook dealing with review engagements contains no mention of a going concern note.

The plaintiffs argued that there were “red flags” which were ignored by Orenstein, including the fact that the limited partnerships were being audited by Revenue Canada, the fact that no yachts had been built and the fact that the earnings of OCGC had been revised downwards. The lack of ships had been explained by problems with the original shipbuilder, Revenue Canada audits are not unusual in the case of aggressive tax shelters and the earnings write-down was said to have been for tax planning purposes. These explanations were held to have been plausible and to hold otherwise would be to judge the accountants with the benefit of hindsight.