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Feedback re: Sherman v. Orenstein & Partners
Published in the May 2006 issue of Litigation Notes - View Article
In the February issue of Litigation Notes, we reported on the Ontario Court of Appeal decision in Sherman v Orenstein & Partners. The case dealt with the scope of a Review Engagement performed by an accounting firm and the plaintiff’s claim that the accountants had been negligent in not including a “going concern” note in the client’s financial statements. We reported the Court’s acceptance of the argument that the inclusion of a going concern note is so serious, it requires of an accountant the kind of enquiry that is incompatible with a review engagement. This argument, according to the Court, was supported by the absence of any reference to a going concern note in the section of the CICA Handbook dealing with Review Engagements.
The financial statements under consideration in Orenstein were for the 1987 year. One of our astute clients has pointed out that since 1995 the CICA Handbook has contained an Assurance and Related Services Guideline (AuG-20) which deals with Review Engagements and contains, in the section entitled “Final considerations for the public accountant”, at point 3, the following question: “During the review, did you become aware of conditions that cast doubt on the ability of the entity to continue as a going concern?”
In the Orenstein case, the expert for the accounting firm had opined that in a Review Engagement, an accountant would have to "stumble over something before he would pursue it." The Court may have set the bar a little higher than that, but not much, quoting the words of the trial judge, who said: "… if in the mind of a reasonable accountant, the information obtained in the course of a review would raise real doubts as to the ability of the business to continue as a going concern, I do not think such doubts could properly have been ignored."
Our client considers that the outcome was correct in Orenstein, because the accountants obtained satisfactory explanations for the so-called “red flags” in that case. However, in view of AuG-20, he would urge accountants not to rely on the “stumble test”. and to be alert to the warning signs of a failing business.