Case No: CH 1996 B No. 477 &
CH 1998 B No. 5286
Neutral Citation Number: [2002] EWHC 461 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 20th March 2002

Before :

THE HONOURABLE MR JUSTICE EVANS - LOMBE
- - - - - - - - - - - - - - - - - - - - -
Between :

	BARINGS Plc (in liquidation) and anr	Claimants	
	- and -		
	COOPERS & LYBRAND (a firm) and ors	Defendants	
-and-			
	BARINGS FUTURES (SINGAPORE) PTE LTD (in liquidation)	Claimants	
	-and-		
	MATTAR and 36 ors	Defendants	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Michael Brindle QC/Craig Orr (instructed by Ashurst Morris Crisp for BFS)
Jonathan Gaisman QC/Christopher Butcher QC/David Bailey/ James Brocklebank (instructed by Clifford Chance for D&T)

Hearing dates: 28th January 2002  -  8th March 2002
- - - - - - - - - - - - - - - - - - - - -
Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

…………………………………..
The Hon. Mr. Justice Evans - Lombe

Mr Justice Evans - Lombe: 

1.	On 23 October 2001 I ordered, on the application of Deloitte & Touche (Singapore) (“D&T”), the trial of a preliminary issue, namely “whether the claim of Baring Futures (Singapore) Pte Limited (“BFS”) against D&T in respect of their 1992 and 1993 audits of BFS fails because D&T have a complete defence of circuity of action and/or a set-off extinguishing BFS’ claim and/or an estoppel preventing BFS from making the claim against them that it does in these proceedings”. D&T allege that these consequences flow from certain representation letters addressed to them by Mr Simon Jones, who was at the relevant time the Finance Director of BFS. In the event, no argument based on estoppel was pursued. 
FACTUAL BACKGROUND
2.	I set out the factual background giving rise to this litigation in my judgment of 23 November 2001, by which I struck out the claims of Barings Plc and Bishopscourt (BS) Limited (formerly Barings Securities Limited (“BSL”) against D&T in the Plc action (as that term is used in that judgment). To render this judgment comprehensible, I need to add a few further facts to the facts set out in that judgment 
Simon Jones
3.	Mr Jones is a qualified accountant. He spent five years at Deloitte Haskins & Sells and seven years as regional finance director, and then Divisional Vice President, of Associated Merchandising Company. In February 1990 he became finance director of Baring Securities (Singapore) Pte Limited (“BSS”), the Barings group’s stockbroking company in Singapore.
4.	In 1990 BFS was a dormant company. Mr Jones was appointed a director of BFS in May 1990, as its second Singapore resident director. The other Singapore resident director, and Mr Jones’ immediate superior, was James Bax, who had been managing director of BSS since August 1987 and of BFS since June 1988. Mr Bax was the head of the Singapore office and was a director of BSL. It is not in issue that Mr Bax played an insignificant role in the immediate supervision of the operations of BFS. 
5.	When BFS became active as a corporate clearing member of SIMEX in June 1992, Mr Jones became its Finance Director.
6.	From the end of 1992 onwards, BSL operated a matrix management system. This meant that the different aspects of the business of the Barings group were organised and managed “globally”. Thus a particular business being conducted by subsidiary A might be managed by directors or executives actually employed by subsidiary (or parent) B. Materially to this judgment (though this is not accepted on every side), responsibility for the trading or “product” aspect of BFS’ business was split from that for the settlement or “operational” side, and both appear to have been managed by executives nominally employed by, or directors of, other companies in the Barings group, in particular BSL and Barings Securities (Japan) Limited (“BSJ”).
7.	Although Mr Jones was, with Mr Bax, one of BFS’ two executive directors, he had no immediate responsibility for BFS’, and therefore Mr Leeson’s, trading activity or the resulting settlement and account-keeping activity. It is not in issue that Mr Jones was responsible for the support facilities provided by BFS for its trading and settlement staff – offices, stationery, computers, personnel and such like; for expenses, tax computations, budgeting on the costs side, capitalisation of the company, and banking arrangements and controls; and for the production of BFS’ annual accounts which had to be consolidated with the accounts of its ultimate parent (BSL in 1992 and Barings plc in 1993).
8.	Mr Jones was nominally Mr Leeson’s immediate superior but whether Mr Leeson reported to him is in dispute. According to the witness statement of Mr Norris (Chief Operating Officer of BSL from October 1992 and Chief Executive of BSL from March 1993), Mr Jones had operational accountability for Mr Leeson’s activities. According to Mr Jones, his responsibility was limited to the accounting side of the office, including checking Mr Leeson’s expenses, and Mr Leeson did not report to him at all. 
9.	There is an issue in the Part 20 proceedings between D&T and BSJ whether Mr Leeson’s trading activity during 1992 and 1993 was controlled from BSJ. At this hearing, D&T deny that Mr Jones perceived Mr Leeson’s trading to be so controlled.
The relevant trading
10.	BFS’ claims against D&T relate to their audits of the period of trading of four months up to 30 September 1992 (“the 1992 audit”) and the period of 15 months up to 31 December 1993 (“the 1993 audit”). 
11.	Until September 1992 BFS was believed by Barings management to be conducting only agency trading. The instructions for this were given by the group of agency traders at BSJ in Tokyo headed by Mike Killian, one of Barings’ experts on derivative trading. This trading was almost wholly on behalf of clients of BSL. The resulting settlements were processed through BFS’ office using the CONTAC system described in my 23 November 2001 judgment. The trades were then reported to BSL by means of the electronic “trade feed” direct from the CONTAC system to BSL’s First Futures system.
12.	It is now known that, within about a month of the commencement of trading, Leeson had procured the system to be falsified so that the trade feed omitted trades booked to the 88888 account.
13.	The electronic feeds from BFS were received at BSL in a settlements department headed by Gordon Bowser, to whom Leeson, at least nominally, reported on the settlement or “operational” side.
14.	From September or October 1992 onwards Mr Leeson commenced executing proprietary or “house” trading in addition to the agency trading. The proprietary trading was executed primarily (there were also some instructions from London) on the instructions of the group of BSJ proprietary traders who from April 1993 onwards were headed by Fernando Gueler. This trading was on behalf of both BSJ and BSL (most of the trading on behalf of BSL being carried out by BSJ traders). Trades for BSL were reported through the trade feed described above. All proprietary trades, whether booked to BSL or BSJ, were reported to BSJ by faxing the daily activity sheets.
15.	Ron Baker became head of Barings’ Financial Products Group in December 1993, the final month of the 1993 audit, and thus became Mr Leeson’s ultimate “product” manager in relation to proprietary trading. Mr Baker did not take over responsibility for agency trading until a year later.
Suppression of activity statements for the 88888 account
16.	At paragraphs 11 to 14 of my 23 November 2001 judgment I explained the BFS computer system and Mr Leeson’s interference with it in pursuance of his fraud. For the purposes of this judgment, I should add one detail to that explanation. 
17.	BFS’ trading computer system, CONTAC, contained full information as to the activity on all BFS accounts, including the 88888 account. It generated daily and monthly activity statements for all BFS accounts, though it appears that monthly activity statements for the 88888 account were not printed out unless requested by Mr Leeson. 
18.	It appears that during 1993, at least, the daily activity statements for the 88888 account were delivered to Mr Leeson, who destroyed them. In 1992 the position is slightly less clear, in that in the course of that audit one of the D&T auditors is known to have traced a payment through to the 88888 account daily activity statement. Therefore it may be that Mr Leeson only began destroying the daily activity statements after that audit.
The chronology of the 1992 and 1993 audits
19.	D&T audited BFS for the first time in relation to the trading period ending 30 September 1992. BFS had commenced active trading on SIMEX only in June 1992 and its revenues, consisting of commission and interest, for the period to 30 September were S$3.9 million. The chronology of D&T’s 1992 audit was as follows:
i)	on 16 October 1992 D&T sent to Coopers & Lybrand (London) (“C&LL”) the consolidation schedules which they had prepared in relation to BFS and the other Barings Singapore companies, for consolidation into the group accounts of BSL. They were expressed to be subject, inter alia, to the resolution of the local statutory accounts;
ii)	on 20 November 1992, D&T sent BFS’ statutory accounts in draft to Mr Jones, along with a draft representation letter addressed to D&T to cover the 1992 audit which they asked him to sign and return. They repeated the request on 10 December 1992;
iii)	on or about 17 December 1992, Mr Jones returned the signed representation letter. Apparently he had had it retyped on BFS letterhead, but he did not change the text from D&T’s draft;
iv)	on 31 December 1992, D&T issued their opinion on the statutory accounts of BFS and submitted their regulatory reports to the Singapore regulators, MAS and SIMEX.
20.	The 1993 audit covered the period 1 October 1992 to 31 December 1993. BFS’ revenues had increased from S$3.9 million for the four months covered by the 1992 audit to S$27.9 million for the 15 months covered by the 1993 audit. 
21.	Mr Jones signed at D&T’s request a representation letter covering the 1993 audit on 27 January 1994. This was in identical form to that for 1992. D&T sent their consolidation schedules to C&LL on 28 January 1994. They issued their opinion on the statutory accounts and the regulatory reports on 28 February 1994.
The representation letters
22.	Each representation letter was written on BFS letterhead and signed by Mr Jones as Finance Director of BFS. Each read as follows:
“Baring Futures (Singapore) Pte Ltd
20 Raffles Place, 24th Floor, Ocean Towers, Singapore 0104

Deloitte & Touche
Certified Public Accountants
95 South Bridge Road #09-00
Pidemco Centre
Singapore 0105

Gentlemen,
FINANCIAL STATEMENTS FOR FINANCIAL [YEAR/PERIOD] ENDED [SEPTEMBER 30, 1992/DECEMBER 31, 1993]
This representation letter is provided to you in connection with your audit of the financial statements of Baring Futures (Singapore) Pte Ltd (“company”) as of the above date and for the period then ended for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the financial position, results of operations and changes in financial position in accordance with statements of accounting standard consistently applied bearing in mind the requirements of the Companies Act.  For convenience the term “company” covers the company and where appropriate the group and members of the group audited by you.
We confirm, to the best of our knowledge and belief, the following representation:
1	We acknowledge our responsibility for the fair presentation of the financial statements in accordance with statements of accounting standard including the appropriate disclosure of all information required by the Companies Act, and in conformity with generally accepted accounting principles in Singapore.
2	There have been no irregularities involving management or employees who have a significant role in the system of internal control or that could have a material effect on the financial statements.  There are no instances where any officer or employee of the company has an interest in a company with which the company does business which would be considered a “conflict of interest”.  Such an interest would be contrary of company policy.
3	We have made available to you all books of account and supporting documentation and all minutes of the meetings of shareholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared from the beginning of the financial year to the date of this letter.
4	The financial statements are free of material errors and omissions.  There are no material transactions or related issues or liabilities that have not been properly recorded in the financial and accounting records.
	Adequate provision has been made for current and deferred taxes on income including adjustments for over or under accrual for prior years.
5	The company has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of non-compliance.
	There have been no communications concerning non-compliance with requirements of regulatory authorities with respect to financial statements nor any fraud or dishonesty reportable by you under section 207(9A) of the Companies Act.
6	Where applicable or required, the following have been properly recorded and, where required, adequately disclosed in the financial statements:
(a)	Balances and transactions with related parties.  The notes to the financial statements fully describe such related party transactions and balances as required by the statement of accounting standard No. 21.  Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions.  There were no non-cash assets over S$100,000 purchased from or sold to a director or director connected person or company requiring shareholders approval in accordance with sections 160A to 160D of the Companies Act.  There were no loans to directors nor assistance to acquire shares in the company or its holding company that breach the Companies Act.
(b)	Losses arising from sale and purchase commitments (including forward transactions in inventories, commodities, foreign exchange etc).
(c)	Agreements to buy back assets previously sold and agreements to repurchase assets previously sold and options to purchase property or equipment of material amounts.
(d)	Assets pledged as collateral.
(e)	Capital shares purchase options or agreements or capital shares reserved for options, warrants, conversions, or other requirements.
(f)	Unasserted claims that our lawyers have advised are probable of assertion.
(g)	All possible claims that our lawyers have advised are probable of assertion.
(h)	All unsupported expenses have been incurred on the company’s business and are a charge to the company.
(i)	All plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
(j)	Capital expenditure commitments.
7	We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements.
	We are aware of the requirements of section 201(3C) of the Companies Act that require the directors to ascertain that no non-current asset is shown at an amount which exceeds the recoverable amount of the non-current asset over its useful life or on its disposal. There are no such items requiring provision or explanation to avoid the financial statements being misleading.
8	The company has satisfactory title to all assets and there are no liens or encumbrances on the company’s assets, except for those that are disclosed in the notes to the financial statements.  Receivables do not include amounts for goods or services provided or transactions that have occurred after the balance sheet date for goods or services not sold.
9	We have recorded or disclosed all liabilities, both actual and contingent, and have disclosed in the notes to the financial statements the guarantees that we have given to all third parties.  Any expenditure included in the accounts where receipts or vouchers were not available was properly made in connection with the carrying on of the company’s business.
10	Other than those described in notes to the financial statements, there have been no events subsequent to the balance sheet date which require adjustment of or disclosure in the financial statements and related notes. 
11	Fixed assets accounts and depreciation accounts have been reduced in respect of all items which have been sold, scrapped or which are otherwise no longer usable.  The carrying costs of the fixed assets and other non-current assets are not in excess of recoverable amounts.  No provision for impairment which is other than temporary is necessary.
12	There are no formal or informal compensating balance arrangements with any of our bank and investment accounts.  Except as disclosed in the notes to the financial statements, we have no other line of credit arrangements.
13	We have properly recorded or disclosed in the financial statements the redemption options and agreements and shares reserved for options, warrants, conversions and other requirements.
14	The company has good title to the fixed assets, investments and other assets detailed in the financial statements, and no provision is necessary for any impairment in value.
	The directors have valued unquoted investments as detailed in the financial statements and have arrived at the values using the basis of valuation more fully described in the notes to the financial statements.

Yours faithfully,     

S.D.Jones
Director 
23.	Paragraph 1 of each letter, by which the management accepted its responsibility for the financial statements, is not relevant to the preliminary issue. The issue turns upon the representations contained in the remaining paragraphs, in particular paragraphs 2, 3, 4, 6, 9 and 10.
EVIDENCE FOR THE PRELIMINARY ISSUE
24.	In advance of the hearing I ordered the parties to exchange schedules setting out the written evidence each would rely upon, and the names of the witnesses who would be called.
25.	Mr Mah, D&T’s only factual witness at this hearing, gave evidence before me for a day and a half. Mr Jones gave oral evidence on behalf of BFS for five days. BFS’ other factual witness, Mr Bax, submitted a witness statement but was not cross-examined. 
26.	Supplementary experts’ reports directed to the preliminary issue were submitted by Mr Spence for D&T and Mr Mason for BFS. In the result Mr Mason gave oral evidence and was cross-examined but Mr Spence was not called.
27.	An unusual aspect of the case was that the parties and court had available to them the verbatim transcripts of the interviews of Mr Jones and other witnesses by the inspectors of the Singapore committee of inquiry into the Barings collapse. Mr Jones was interviewed on four separate occasions by the inspectors between 30 March and 30 May 1995. I have also been directed to a letter dated 16 March 1995 to that inquiry from Mr Jones’ Singapore solicitors and to the affidavit Mr Jones swore in March 1998 in the Company Directors Disqualification Act proceedings against Mr Bax. 
28.	Finally, I was referred to a large amount of written evidence recording the recollections of other witnesses who were not called to give oral evidence: witness statements in these proceedings, interviews by the Singapore inspectors and the SFO, and affidavits in CDDA proceedings. I am of course conscious of the need for care as to the weight to be attached to such evidence, given that it has not been tested by cross-examination.
29.	In the context of the procedure followed, I should add that, after hearing the oral evidence, I initially asked the parties to make their closing submissions only on the legal issues that had been raised, on the assumption that Mr Jones had been fraudulent. However, having heard their submissions, I did then invite the parties to address me on the issue of deceit, namely the effect of the representation letters as statements by Mr Jones, the test of what constitutes reckless fraud and whether Mr Jones’ conduct in signing the representation letters was reckless within that test.
THE ELEMENTS OF D&T’S DEFENCE
30.	The hearing proceeded, as does this judgment, on the assumption that in the main trial BFS will establish that D&T were negligent in conducting their 1992 and 1993 audits in the respects pleaded at paragraphs 73 and 74 of the re-amended statement of claim. I need hardly say that this remains an entirely open question and nothing in this judgment should be read as indicating the contrary.
D&T’s case in the preliminary issue  
31.	It is to be assumed, but not conceded, that D&T were negligent in their conduct of the 1992 and 1993 audits and would be liable for the claimed damages as a result. That liability was the result of their certifying the consolidation schedules and statutory accounts without qualification, notwithstanding the discoverable unauthorised dealings by Mr Leeson, but it might also result from a failure to warn BFS of those dealings as they should have been discovered in the course of the audits. The damage resulting from these acts, or failures to act, necessarily accrued after the negligent acts in question and resulted from Mr Leeson being thereby enabled to continue his fraudulent activity, thus producing or increasing BFS’ losses. 
32.	It was the invariable practice of D&T to require its audit clients to provide a representation letter, signed by an appropriately senior and knowledgeable director or senior employee and containing representations similar to those in the representation letters in question, before they would certify the statutory accounts (on which the final certification of the consolidation schedules was dependent) and the regulatory returns in respect of the year being audited.
33.	Mr Jones, as the Finance Director, signed the representation letters. His office made him ostensibly the suitable signatory. However, unknown to D&T, his contact with BFS during the 1992 and 1993 accounting periods was so small that he had no relevant knowledge, either of his own or as a result of enquiries, which would render him properly able to sign the letters. He did so recklessly and thus fraudulently (Derry v Peek (1889) 14 App. Cas. 337). 
34.	Mr Jones’ signature on the representation letters induced D&T to certify the accounts, which they would not have done without it. Had they refused to certify the accounts, the subsequent damage to BFS would have been averted because the resulting enquiries would have led to Mr Leeson being unmasked. Therefore Mr Jones’ reckless signature was a cause of the exposure of D&T to the claims for negligence being made against it.
35.	Mr Jones signed the representation letters as a director of BFS and in the course of acting as such a director. It follows that BFS is vicariously liable for the consequences of his doing so (Lloyd v Grace, Smith & Co [1912] AC 716).
36.	It further follows that D&T have a claim against BFS for the consequences of Mr Jones’ fraud. That claim in fraud “trumps” D&T’s negligence as a cause of D&T’s exposure to BFS’ claim, with the result that contributory negligence is not available to reduce D&T’s claim (Standard Chartered Bank v Pakistan National Shipping Corp (No. 4) [2001] QB 167). That claim mirrors the damages being claimed against D&T and so gives them an absolute defence of circuity. D&T accept that, if Mr Jones’ conduct can only be categorised as negligent, they will not have demonstrated a complete defence to BFS’ claim.
37.	In order to make out their case in deceit, D&T have to establish the following:
i)	one or more representations by Mr Jones,
ii)	which were false,
iii)	which were made deceitfully (in this case recklessly, so as to amount to deceit),
iv)	which were intended to, and did, induce D&T to engage in, or abstain from, certain conduct, 
v)	which caused loss to D&T, and
vi)	for which BFS is responsible.
38.	It will be seen from the above analysis of D&T’s case in the preliminary issue that, in order to succeed in demonstrating that they have a complete defence to BFS’ claim, they must establish that, in signing the representation letters, Mr Jones was making fraudulent misrepresentations to D&T. They seek to do so, not by demonstrating that he knew at the time that the material statements in the letters were false, but rather that he was reckless of their truth or falsity. As I shall later demonstrate, this involves a finding as to the subjective state of mind of Mr Jones at the time of signing. I shall deal with this issue, which comprises issues (i), (ii) and (iii) above, first.
39.	In arriving at a conclusion on this issue, it will be necessary to make not only this but other subsidiary findings of fact. I can only make these findings on the basis of the evidence put before me by the parties in the preliminary issue. It is important to bear in mind that, if the trial is to continue, these findings may have to be revised in the light of the further evidence which will emerge.
LEGISLATION AND ACCOUNTING  GUIDANCE
40.	It is convenient and, I hope, helpful to set out at this point the basic legislation and accounting guidance in force in Singapore which applied to the 1992 and 1993 audits.
Singapore legislation
41.	The relevant provisions of the Singapore Companies Act (and their equivalents in the UK Companies Act 1985) are as follows:
Section 172 (equivalent s.310 CA 1985)
(1) Any provision, whether in the articles or in any contract with a company or otherwise, for exempting any officer or auditor of the company from, or indemnifying him against, any liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void.
Section 201 (equivalent s.226 CA 1985)
(1) The directors of every company shall … lay before the company at its annual general meeting a profit and loss account … that gives a true and fair view of the profit and loss of the company …
(3) The directors of every company shall cause to be made out, and to be laid before the company at its annual general meeting with the profit and loss account required by subsection (1) a balance-sheet … that gives a true and fair view of the state of affairs of the company …
(4) The profit and loss account and the balance-sheet of a company … shall be duly audited before they are laid before the company at its annual general meeting as required by this section and the auditor’s report required by section 207 shall be attached to or endorsed upon the accounts…
Section 205 (equivalent s.384 CA 1985)
(1) The directors of a company shall … appoint a person or persons to be the auditor or auditors of the company …
Section 207 (equivalent ss.235 and 237 CA 1985)
(1) An auditor of a company shall report to the members on the accounts required to be laid before the company in general meeting and on the company’s accounting and other records relating to those accounts …
(2) An auditor shall, in a report under this section, state –
(a) whether the accounts … are in his opinion properly drawn up (i) so as to give a true and fair view of the matters required by section 201 to be dealt with in the accounts …; and (ii) in accordance with this Act so as in the case of a balance-sheet to give a true and fair view of the company’s affairs and in the case of a profit and loss account to give a true and fair view of the company’s profit or loss;
(b) whether the accounting and other records … have been, in his opinion, properly kept in accordance with this Act;
(3) It is the duty of an auditor of a company to form an opinion as to each of the following matters:
 (a) whether he has obtained all the information and explanations that he required;
(b) whether proper accounting and other records, including registers, have been kept by the company as required by this Act…
and he shall state in his report particulars of any deficiency, failure or shortcoming in respect of any matter referred to in this subsection.
Singapore Statements of Auditing Guideline (“SAGs”)
42.	The SAGs in force at the material time were those approved by the Institute of Certified Public Accountants of Singapore and its predecessor bodies. All mirror very closely the relevant current International Auditing Guidelines (“IAG”), identified below. Their substance is also broadly the same as the relevant current UK Auditing Guidelines and Statements of Accounting Standards, also identified below.
SAG 9 (Audit Evidence) (equivalent to IAG 8 and UK Auditing Guideline 203)
12. The auditor obtains evidence in performing compliance and substantive procedures by one or more of the following methods:
•	inspection; 
•	observation;
•	inquiry and confirmation;
•	computation; and
•	analytical review.
15. Inquiry consists of seeking appropriate information of knowledgeable persons inside or outside the entity. Inquiries may range from formal written inquiries addressed to third parties to informal oral inquiries addressed to persons inside the entity. Responses to inquiries may provide the auditor with information which he did not previously possess or may provide him with corroborative evidence.
16. Confirmation consists of the response to an inquiry to corroborate information contained in the accounting records. For example, the auditor normally requests confirmation of receivables by direct communication with debtors.
SAG 12 (Fraud and Error)  (equivalent to IAG 11 and UK Auditing Guideline 418)
4. The responsibility for the prevention and detection of fraud and error rests with management through the implementation and continued operation of an adequate system of internal control. Such a system reduces but does not eliminate the possibility of fraud or error.
5. The objective of an audit of financial information is to enable an auditor to express an opinion on such financial information. In forming his opinion, the auditor carries out procedures designed to obtain evidence that will provide reasonable assurance that the financial information is properly stated in all material respects. Consequently, the auditor seeks reasonable assurance that fraud or error which may be material to the information has not occurred or that, if it has occurred, the effect of fraud is properly reflected in the financial information or the error is corrected. The auditor, therefore, should plan his audit so that he has a reasonable expectation of detecting material misstatements in the financial information resulting from fraud or error. The degree of assurance of detecting errors would normally be higher than that of detecting fraud, since fraud is usually accompanied by acts specifically designed to conceal its existence.
8. The risk of not detecting material misstatement resulting from fraud is greater than the risk of not detecting a material misstatement resulting from error, because fraud usually involves acts designed to conceal it, such as collusion, forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the audit. Unless the auditor’s examination reveals evidence to the contrary, he is entitled to accept representations as truthful and records and documents as genuine. However, the auditor should plan and perform his audit with an attitude of professional scepticism recognising that he may encounter conditions or events during his examination that would lead him to question whether fraud or error exist.
9. While the existence of an effective system of internal control reduces the probabilities of misstatement of financial information resulting from fraud or error, there will always be some risk of internal controls failing to operate as designed. Furthermore, any system of internal control may be ineffective against fraud involving collusion among employees or fraud committed by management. Certain levels of management may be in a position to override controls that would prevent similar frauds by other employees; for example, by directing subordinates to record transactions incorrectly or to conceal them, or by suppressing information relating to transactions.
11. In planning and performing his examination, the auditor should take into consideration the risk of material misstatement of the financial information caused by fraud or error. He should inquire of management as to any fraud or significant error which has occurred in the reporting period and modify his audit procedures, if necessary.
SAG 20 (Representations by Management) (equivalent to IAG 22 and SAS 440)
2. The auditor performs various audit procedures designed to obtain sufficient appropriate audit evidence to enable him to express an opinion on the financial statements as a whole. One form of audit evidence is relevant representations from management.
4. The auditor should obtain evidence that management acknowledges its responsibility for the appropriate presentation of the financial statements and that management has approved the financial statements. The auditor can obtain evidence of management’s acknowledgement of such responsibility and approval from relevant minutes of meetings of the management board or similar body or by obtaining a written representation from management or a signed copy of the financial statements.
5. During the course of an audit, management makes many representations to the auditor, either unsolicited or in response to specific inquiries. When such representations relate to matters which are material to the financial statements, the auditor should:
•	seek corroborative audit evidence from sources inside or outside the entity,
•	evaluate whether the representations made by management appear reasonable and consistent with other audit evidence obtained, including other representations, and
•	consider whether the individuals making the representations can be expected to be well-informed on the matter.
If a representation by management is contradicted by other evidence, the auditor should investigate the circumstances and, when necessary, reconsider the reliability of other representations made by management.
6. Representations by management cannot be a substitute for other audit evidence that the auditor would expect to find. For example, a representation by management as to the original cost of an asset is no substitute for the normal evidence of such cost that an auditor would expect to find. If the auditor is unable to obtain sufficient appropriate audit evidence that he believes should be available, this will constitute a limitation in the scope of his examination even if he has a representation from management on the matter.
7. In certain instances a representation by management may be the only audit evidence which can reasonably be expected to be available. For example, the auditor would not necessarily expect that other evidence would be available to corroborate management’s intention to hold a specific investment for long-term appreciation. In such circumstances, provided that the auditor obtains written confirmation of management’s oral representations, this may not constitute a limitation on the scope of his examination.
8. The auditor can document in his working papers evidence of management’s representations by summarising oral discussions with management, or by obtaining written representations from management. Written representations can take the form of:
•	a representation letter from management, or
•	a letter from the auditor outlining his understanding of management’s representations, duly acknowledged and confirmed by management.
9. The possibility of misunderstandings between the auditor and management is reduced when oral representations are confirmed by management in writing. Furthermore, as described in paragraph 7, written representations from management should be obtained to confirm oral representations given to the auditor on matters material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist. Matters which might be included in a letter from management or in a confirmatory letter to management are contained in the example of a management representation letter in the Appendix.
13. A management representation letter should be signed by the members of management who have primary responsibility for the entity and its financial aspects, usually the senior executive officer and the senior financial officer, based on the best of their knowledge and belief…
14. If management refuses to provide representations that the auditor considers necessary, this will constitute a limitation on the scope of his examination. In such circumstances, the auditor should evaluate any reliance he has placed on other representations made by management during the course of his examination and consider if the refusal may have any additional effect on his report.
43.	Finally in this section I should set out the well-known extract from the judgment of Lord Oliver in Caparo v Dickman [1990] 2 AC 605 at page 630, dealing with an auditor’s functions:
“My Lords, the primary purpose of the statutory requirement that a company’s accounts shall be audited annually is almost self-evident. The structure of the corporate trading entity, at least in the case of public companies whose shares are dealt with on an authorised stock exchange, involves the concept of a more or less widely distributed holding of shares rendering the personal involvement of each individual shareholder in the day-to-day management of the enterprise impracticable, with the result that management is necessarily separated from ownership. The management is confided to a board of directors which operates in a fiduciary capacity and is answerable to and removable by the shareholders who can act, if they act at all, only collectively and only through the medium of a general meeting.  Hence the legislative provisions requiring the board annually to give an account of its stewardship to a general meeting of the shareholders. This is the only occasion in each year on which the general body of shareholders is given the opportunity to consider, to criticise and to comment on the conduct by the board of the company’s affairs, to vote on the directors’ recommendation as to dividends, to approve or disapprove the directors’ remuneration and, if thought desirable, to remove and replace all or any of the directors. It is the auditors’ function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, second, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided.”
THE REPRESENTATIONS
44.	I heard argument as to the precise meaning of the express representations in the representation letters and whether, and if so what, further representations were to be implied into them. 
45.	It seems to me clear that, by the words in the representation letters which he signed, Mr Jones was representing that the statements in those letters were true as far as he knew. The contrary was not seriously argued.
46.	As regards any implied representation, Mr Brindle for BFS submitted that, by signing the letters, Mr Jones was representing only that he had knowledge of some relevant facts and genuinely believed the truth of the matters stated. He adopted the test propounded by Longmore J in Credit Lyonnais v ECGD [1996] 1 Ll.Rep. 200, at page 216:  
“any opinion given carries with it a representation that the maker of the statement has some genuine factual basis for the formation of [his] opinion” 
or, as Simon Brown LJ put it in Economides v Commercial Assurance [1998] QB 587, at page 598, 
“the plaintiff had to have some basis for his statement of belief in this valuation; he could not simply make a blind guess: one cannot believe to be true that which one has not the least idea about. But … the basis of belief does not have to be an objectively reasonable one. … he was under a duty of honesty, not a duty of care.”
47.	While by the conclusion of the hearing there was some suggestion that Mr Brindle accepted some higher level of test, I do not think that was formally conceded.
48.	Mr Gaisman for D&T, on the other hand, relied upon Smith v Land and House Property Corporation (1884) 28 Ch.D.7 and Brown v Raphael [1958] Ch. 636, in support of the implication that Mr Jones was representing that he had reasonable grounds for the belief expressed in his express representations. In the former case, Bowen LJ, at page 15, said that: 
“if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion.” 
49.	In Brown v Raphael, Lord Evershed MR, at page 642, noted that “it suffices for the application of the principle if it appears that, between the two parties, one is better equipped with information or the means of information than the other.” This test was clearly met in circumstances where the vendor’s solicitors expressed an opinion in sale particulars as to an important aspect of the property up for sale about which the purchaser could know nothing: Lord Evershed continued, at page 643:
“What would be the effect of this language upon the mind of a possible purchaser? Clearly, I should have thought, it would flow from the language used and would be intended to be understood by a reader of the particulars that persons who knew the significance of this matter and who were experienced and competent to look into it were expressing a belief founded upon substantial and reasonable grounds.”
50.	In cross-examination, Mr Jones accepted that, in signing the representation letters, he was representing that he had reasonable grounds for doing so. Given that implication of a term is a matter of law, that is not decisive. However I do not read the judgments of the Court of Appeal in Economides as deciding that the test in Brown v Raphael should not be applied to a representation by a professional man, in a position where he would be expected to have significantly greater knowledge of the facts represented than did the representee. Indeed Peter Gibson LJ, at page 606, expressly distinguished the facts of Brown v Raphael, in which “the statement of belief came from reputable solicitors in respect of a matter … which they would be expected to know and on which they had advised the vendor”, and of Highlands Insurance Co v Continental Insurance Co [1987] 1 Ll.Rep. 109, in which the relevant representation was made by a professional underwriter, from “a case such as the present where the statement is made by a layman with no relevant skills.”
51.	Mr Jones was the finance director of the audit client, making representations as to the financial statements which he had the responsibility for preparing and the financial records which he had the responsibility for keeping. While the auditors had spent two or three weeks auditing the company, plainly they could not be expected to have as much knowledge of these matters as the finance director: otherwise there would be no point in having a representation letter. It seems to me that the test in Brown v Raphael applies and Mr Jones’ representations included the implied representation that he had reasonable grounds for making the statements he did.
52.	Accordingly I conclude that the representation letters constituted representations by Mr Jones that:
i)	he believed the statements in the letters to be true, and
ii)	he bona fide believed that he had reasonable grounds for making representation (i).
FALSITY OF REPRESENTATIONS
53.	There is no dispute that a number of the statements in the letters were inaccurate: D&T rely upon statement 2, that there had been no irregularities involving employees that could have a material effect on the financial statements; statement 4, that the financial statements were free of material errors and omissions; statement 6, that transactions with related parties and losses on sale and purchase commitments had been properly recorded; statement 9, that BFS had recorded or disclosed all its liabilities; and statement 10, that there had been no post-balance sheet events requiring adjustment of or disclosure in the financial statements. 
54.	In a slightly different category was statement 3, that BFS had made available to D&T all books of account and supporting documentation. As I have described above, in 1993 Mr Leeson suppressed the daily activity statements for the 88888 account and therefore they were not available in paper form to D&T (though the data was available on CONTAC, to be printed out if required). BFS submitted that the evidence did not establish that the same was true for 1992.
55.	It is not alleged that Mr Jones knew the statements in the letters to be untrue. However D&T contend that representation (i) was nevertheless false, in that Mr Jones did not believe that the statements were true. Likewise they contend that Mr Jones did not bona fide believe that he had reasonable grounds for making representation (i), and therefore representation (ii) was also false.
56.	Both D&T’s propositions were disputed by BFS. In part, the answer depends upon the test for the mental element in deceit, to which I come next.
DECEIT:  THE TEST FOR DECEIT
57.	There was little disagreement between the parties as to the definition of the mental element in deceit which D&T had to establish. Both pointed me to the classic statement of the law by Lord Herschell in Derry v Peek (1889) 14 App. Cas. 337 at page 374:
“fraud is proved when it is shewn that a false representation has been made (1) knowingly, (2) without belief in its truth or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.”
58.	In Angus v Clifford [1891] 2 Ch 449 at page 471, Bowen LJ provided some further guidance on the third possibility described by Lord Herschell:
“… the old direction [to the jury], time out of mind, was this, did he know that the statement was false, was he conscious when he made it that it was false, and without caring? Not caring, in that context, did not mean not taking care, it meant indifference to the truth, the moral obliquity which consists in a wilful disregard of the importance of truth…”
59.	In the light of these authorities, the burden on D&T is to establish that, when Mr Jones signed the representation letters, he did so:
i)	knowing that the statements in the letters were untrue, without an honest belief in their truth, or indifferent as to whether or not they were true, or
ii)	knowing that he had no reasonable grounds for making the statements, without an honest belief that he had such grounds, or indifferent as to whether he had or not.
60.	These tests are subjective. As is pointed out in Spencer Bower on Actionable Misrepresentation (4th ed.) at paragraph 110:
“A representor may have acted on inquiry and materials which would not have satisfied a person of normal intelligence, much less a trained judge, but this counts for nothing if the belief – the individual being who he was – really and truly existed. Belief is none the less belief because it is irrational.”
61.	Nonetheless, given the difficulty described by Bowen LJ in Angus v Clifford in “look[ing] into a man’s mind”, a court has to have regard to the surrounding circumstances in trying to descry his belief when he made the representation. The inquiry is not limited to “did he believe this statement to be false when he made it?” The court should also ask “must he have believed it to be false?”
62.	An aspect of this regard to surrounding circumstances is motive. I fully accept D&T’s contention that motive is irrelevant to fraud (see Derry v Peek per Lord Herschell at page 374: “if fraud be proved, the motive of the person guilty of it is immaterial.”). Nevertheless, in trying to decide whether a person made a statement which he must have known to be false (or which satisfied the other tests set out above), it must be relevant to consider why he should have done so. A man is more likely knowingly to make a false statement if he has some reason for doing so. The question is what was the state of mind of Mr Jones at the moment he signed the representation letters. It must be shown that at that moment he must have known that he had no proper basis in knowledge, either direct or indirect through enquiry of others, for signing. Since Mr Jones did sign the letters, it is easier to conclude that he did so knowing that he should not if it is possible to demonstrate a likely motive for signing, notwithstanding a lack of such knowledge.
DECEIT:  WAS MR JONES DECEITFUL?
D&T’s case
63.	Mr Gaisman for D&T contended strongly that Mr Jones signed the representation letters without any honest belief either in the truth of many of the statements in them or in his having reasonable grounds for making the statements. This was on the basis that Mr Jones had no relevant personal knowledge of the matters dealt with by the representation letters, and made no inquiries of people who had that knowledge. 
64.	Mr Gaisman supported his contention by pointing to passages in Mr Jones’ evidence given to the Singapore inspectors in 1995 in which, Mr Gaisman argued, Mr Jones disowned any relevant knowledge of, or involvement in, BFS’ activities. Insofar as Mr Jones now claims to have had greater knowledge and involvement than he admitted to then, Mr Gaisman said that his 1995 evidence was bound to be more reliable. But in fact, Mr Gaisman argued with some justification, Mr Jones’ evidence under cross-examination proved in some respects to be closer to his evidence in 1995 than it did to the contents of the witness statement which he prepared (admittedly without the benefit of access to the Singapore transcripts or the contemporary documents) in November 2001. 
65.	In his witness statement and under cross-examination, Mr Jones relied on a number of factors which, he contended, meant that he believed that the representation letters were true and that he had reasonable grounds for making the representations. I shall deal with those in detail, but Mr Gaisman argued that many of them were without substance and those that remained could not have allowed Mr Jones to believe honestly that he was able to sign the letters. 
66.	Mr Gaisman cross-examined Mr Jones in relation to certain incidents in 1994, 1995 and last year when, he argued, Mr Jones had misled auditors, regulators and the Court in order to serve his current objectives. He also argued that Mr Jones’ evidence to the Court at this hearing was that of a thoroughly unreliable witness who distorted the truth to fit in with his own interests. Mr Gaisman alleged that this propensity to make deliberately false or reckless statements on important occasions rendered it likely that Mr Jones was prepared to sign the representation letters without any honest belief in their truth, and that his professions to the contrary in the witness box were not to be accepted. 
67.	Mr Gaisman said that it was in Mr Jones’ interests to lie on this occasion because of his anxiety to maintain the delusion practised on auditors and regulators, that BFS had local management who were involved in its operations. Had that delusion not been maintained, MAS and SIMEX would not have allowed BFS to continue operating as it was, and D&T would not have accepted a representation letter signed by him (and there was no other director qualified to sign). Alternatively Mr Gaisman submitted that Mr Jones, for the sake of his reputation and prospects in Barings, did not wish to risk the obloquy of delaying the finalisation of the Group accounts, which he would have caused by either telling D&T that he was not in a position to sign a representation letter or taking the time to check the truth of the statements in the letter. Alternatively Mr Jones just could not be bothered, for whatever reason, to check the truth of his statements, and that was enough to establish fraud.
BFS’ case
68.	In reply, Mr Brindle for BFS argued that Mr Jones did believe the representations to be true and his grounds for making the representations to be reasonable. While Mr Brindle conceded that Mr Jones was a far from satisfactory witness, he said that his evidence was in its essentials consistent with his evidence to the Singapore inspectors. His conduct in 1992 and 1993 should not be judged by reference to his conduct in later years, when circumstances were very different.
69.	Mr Brindle admitted that Mr Jones had proved to have been wrong in relation to some of the factual matters upon which he said in his witness statement he relied, in signing the representation letters. But he contended that this was so only to a limited extent: Mr Jones’ functions as Finance Director gave him detailed personal knowledge of the subject-matter of many of the representations; and Mr Jones honestly believed that he could make the other representations in the light of, among other things, his knowledge of the systems and controls applying to BFS. 
70.	Mr Brindle submitted that Mr Jones had no motive for making the representations fraudulently, for reasons I shall explain below.
Mr Jones’ knowledge of BFS’ activities 
71.	Mr Jones accepted that he did not make any specific enquiries before signing the representation letters, other than that he says that he had discussions with Mr Leeson concerning the level of commission charged to clients at about the relevant time in each year. His evidence was that he had sufficient knowledge about BFS to feel able to sign the letters.
72.	Mr Jones accepted that he had no continuing involvement in either the trading or the settlement side of BFS’ activities. As it emerged from the evidence, the most important areas of knowledge as to the company’s activities in 1992 and 1993 available to him when he signed the representation letters were the following:
	Mr Jones’ knowledge of BFS’ operations and controls
73.	It is I think accepted by both parties that the following were the essential features of BFS’ business as it was established:
•	it was set up as a small, simple order-filler, to allow BSL’s and BSJ’s traders to execute trades in Singapore where margin requirements were lower than in Japan. Accordingly its function was to be limited to filling the orders placed by BSL and BSJ traders (and, to a much lesser extent, its two other clients, Barings Hong Kong and Banque Nationale de Paris) and not to initiating its own trades,
•	orders were placed by BSL or BSJ and executed, and the details were transmitted back to BSL and BSJ. The transmission to London was by automatic computer feed and that to Japan was by fax,
•	BSL’s and BSJ’s settlements departments reconciled all trades done on their behalves. Virtually all agency trading was for accounts maintained in London. Proprietary trading was on behalf of both BSL and BSJ, though it was all initiated by BSJ traders. BSJ provided to London details of all proprietary trading carried out by BFS and BSJ,
•	the BSL settlements department checked BFS’ margin requirement against the trade information before remitting the margin to Citibank. BSJ calculated the margin required in relation to its own proprietary trading and remitted it to BFS. 
74.	Mr Leeson’s fraud meant that not all of these points proved to be correct, and he came to take a much larger role in initiating legitimate trades over time, but the above is the structure as Barings management believed it to exist in 1992 and 1993.
75.	Mr Jones said that he knew the above details, as a result of his involvement in the establishment of BFS and later discussions. Although Mr Gaisman suggested that Mr Jones’ knowledge of these matters was a recent invention, I am satisfied that that is not the case. Mr Jones was involved in the discussions leading up to the establishment of BFS, in particular with Mr Bax, Mr Bowser (Derivatives Controller in BSL Settlements), Mr Killian of BSJ, and Mr Dickel (who was responsible for setting up BFS’ systems). He was involved in the administrative arrangements for banking, expenses and personnel for BFS. Mr Mah’s evidence was that Mr Jones had more than minimal knowledge of both the trading and financial affairs of BFS. Certainly Mr Jones in his evidence to the Singapore inspectors tried to play down his involvement in, and knowledge of, BFS’ systems, and to present the impression that he was excluded from the chain of command. But I am satisfied that he was told enough in 1992 to understand the very simple concepts (for someone with his background) set out above.
76.	Mr Jones’ evidence was that he had little or no knowledge of the internal procedures within BFS for the recording and settlement of trades. But he understood the feed to London and the verification of trades and reconciliation of margin calls by BSL and BSJ to constitute a watertight control on the very simple activity conducted by BFS. He said to the Singapore inspectors in 1995 that “anyone who paid their margin calls I assumed was knowing the trades and knowing the basis of the margins they were paying” and that was a view shared by Mr Bax, Mr Mah and Mr Spence, D&T’s audit expert. Mr Spence commented in his report:
“It would be reasonable to expect that the process of reconciliation of margin calls by the related company customers would serve to identify fraudulent acts.”
77.	I also note that Mr Bowser was involved in the specification of the feeds to London and it would be reasonable to assume that the system which resulted would provide an effective control.  
78.	Mr Gaisman attacked Mr Jones’ evidence on the basis that Mr Jones knew that the London settlements department was subject to serious problems and therefore could not be relied upon as a control. However I accept Mr Jones’ evidence, supported by the unchallenged evidence of Mr Bax and statements contained in Mr Bowser’s witness statement, that these problems related to client balances, not to an issue such as the reconciliation of margin between BFS and BSL.
	Supervision of BFS’ trading and settlement functions, and of Mr Leeson
79.	Mr Jones accepted that he played no material part in the day-to-day supervision of BFS’ trading and consequential settlement and recording of that trading during the periods of the 1992 and 1993 audits.
80.	Mr Killian was the General Manager of BSJ’s Futures and Options Sales Department, and head of its agency trading group. It was his idea to start trading on SIMEX and he became a director of BFS. All BFS’ agency trading was the execution of orders placed by Mr Killian’s agency group. 
81.	Mr Gueler was the head of the proprietary derivatives traders in Japan from April 1993, and in its earlier stages all BFS’ proprietary trading was the execution of trades placed by Mr Gueler’s group (as Mr Leeson’s switching business developed, he initiated the trades on SIMEX, and Mr Gueler’s group handled the matching trades on the Japanese markets).
82.	D&T’s skeleton argument for the trial alleges that Mr Killian was Mr Leeson’s product manager for agency business until January 1995 and that Mr Gueler had managerial responsibility for the Japanese derivatives books of which Mr Leeson’s proprietary trading formed part. This is supported by Mr Bax’s witness statement, and Mr Killian’s witness statement records that he was in touch with Mr Leeson daily during his initial posting. However at this hearing D&T contended that Mr Jones’ perception at the time was that Mr Leeson was in fact unsupervised. In putting this to Mr Jones they drew on Mr Jones’ evidence to the Singapore inspectors, to the effect that Mr Leeson was running the operation on his own from 1993.  
83.	This is the trial of a preliminary issue and, if the trial is to continue, the question of whether BSJ personnel supervised Mr Leeson’s trading will be a very live one in the contribution proceedings. BSJ has made clear that it disputes vigorously the case put forward by D&T in its skeleton for the trial. However for the purposes of the preliminary issue I accept Mr Jones’ evidence that, when BFS was established, he believed that Mr Killian, the head of agency trading, would be the person principally in charge of Mr Leeson’s trading operations. Mr Jones’ evidence was that he did not know in 1993 that Mr Leeson was carrying out arbitrage trading. It was not put to Mr Jones whether he knew that Mr Leeson was conducting proprietary trading at all in 1993. I infer not, but it is clear from his other evidence that Mr Jones knew that Mr Gueler was in charge of proprietary trading and that, if Mr Jones knew that Mr Leeson was conducting such trading, he believed it to be supervised by Mr Gueler (and, above Mr Gueler, by Mr Baker after he took over the Financial Products Group in December 1993). When answering questions in Singapore about the extent to which Mr Leeson was supervised, Mr Jones appears to have been directing his mind only to the extent to which Mr Leeson was supervised from London.
84.	It is less controversial that settlement of trades between BFS and BSL was handled by the BSL settlements department under Mr Bowser. In the structure as devised in 1992 Mr Leeson was to report to Mr Bowser on the “client” settlements side, and Mr Jones was to supervise settlement with SIMEX (though he admitted that he did not do so, except in the sense of being available if there were any problems, and that in practice Mr Leeson performed this function unsupervised). Mr Bax’s unchallenged evidence was that, as BFS was established, Mr Leeson was to report to Mr Bowser in relation to the settlement of the transactions undertaken for Mr Killian’s agency clients.
	Administrative and financial back-up
85.	Mr Jones performed the normal finance director’s functions in providing administrative and financial back-up to BFS’ activities. He dealt with expenses, tax computations, budgeting on the costs side, capitalisation, premises, personnel issues, and banking arrangements and controls. He discussed with Leeson the level of commission income charged to BFS’ clients. He and/or his staff were responsible for the drawing up of the financial statements which were audited by D&T. 
86.	Mr Jones’ evidence was that he reviewed the financial statements, but he could only verify the expenses figures. The income figures meant nothing, as they did not reflect trading profits (which were recorded in the clients’ books) but only commission and interest on client margins held on deposit. The margin owed by SIMEX and to clients likewise reflected only the level of clients’ trading at the year-end.
87.	While Mr Jones’ account of his involvement in these matters was challenged by D&T, his account seems consistent with his evidence to the Singapore inspectors and the documentation.
Audits and consolidation with BSL accounts
88.	Finally, when he signed the 1992 representation letter Mr Jones knew that the BFS consolidation schedule had been submitted for incorporation into the BSL group accounts nearly two months earlier, and presumably no discrepancies in inter-company balances or other items had been found. Also D&T had completed all their investigative work without finding any problems with the financial statements. Clearly an audit could not form a basis for representations to the auditor, but the fact that the auditors had found no irregularities could contribute to an honest belief that there were no such irregularities.
89.	The same is true of the 1993 D&T audit. In addition, there had been a regulatory audit by SIMEX during the year, which had found no significant problems.
Must Mr Jones have had no honest belief in the representations made?
90.	It is not disputed by D&T that Mr Jones had sufficient knowledge on the basis of his own responsibilities to make a number of the representations: in particular those in paragraphs 4 (second part), 6(c), 7, 8, 11 and 14. D&T do not allege that these representations were false, relying only on paragraphs 2, 3, 4 (first part), 6(a) and (b), 9 and 10. 
91.	Of those representations, I shall deal first with representation 3. This was a representation that BFS had made available to D&T all books of account, supporting documentation, etc. D&T say that, since Leeson destroyed the daily activity statements for the 88888 account, this representation was false. Given Mr Jones’ complete absence of knowledge as to BFS’ records, he could not have had an honest belief that the representation was true, and must have known he had no reasonable grounds for making it. 
92.	On this representation, I accept Mr Mason’s and Mr Jones’ evidence that in practice an audit client does not physically hand over to its auditor all its records at the start of the audit. Instead it gives the auditor the trial balance and the auditor then asks for the records which he needs to verify the balance as the audit proceeds. That was how the BFS audit was handled. Mr Jones had no idea of the existence of account 88888, and thus of any daily activity statements in respect of it. Even if Mr Leeson had suppressed those statements (and there is a question whether he did so in 1992), there was no reason why Mr Jones should have known that. Therefore, in the absence of any complaint by the auditors, Mr Jones was entitled to have an honest belief in the truth of that representation and that he had reasonable grounds for giving it, notwithstanding that Mr Jones appears to have had little if any knowledge of BFS’ internal systems and controls.
93.	I turn to representation 10, dealing with post-balance sheet events. D&T allege that the representation that there had been no such events was false by reason of the Yen 670 million transfer from BSL which Mr Leeson caused to be credited to the 88888 account on the last day of the 1992 accounting year and then reversed out after the year-end. Mr Jones’ evidence was that this was not a post-balance sheet event, a term which he understood as referring to major events such as a major client or the exchange getting into financial difficulties. Rather, it was an issue as to the point in time at which a payment should be treated as received and how this payment should be treated in BFS’ books. In any event Mr Brindle submitted that (a) Mr Jones was not aware of the receipt, and there was no suggestion that he should have been checking bank reconciliations and statements himself and (b) Mr Jones had discussed the post-balance sheet events review with D&T. If such an issue, turning purely on the correct accounting treatment of a receipt, constituted a post-balance sheet event, he reasonably relied on D&T to identify it.
94.	These reasons seem to me persuasive. Thus in my judgement Mr Jones was entitled to have an honest belief in the truth of representation 10 and to believe that he had reasonable grounds for giving it.
95.	The issue therefore becomes whether Mr Jones was deceitful when he made the representations in paragraphs 2, 4 (first part), 6(a) and (b), and 9. These dealt with irregularities by employees, errors in the financial statements, proper recording of transactions and disclosure of liabilities. 
96.	My conclusion is that Mr Jones was not deceitful in making those representations. This is for two reasons.
i)	the first is simply the result of assessing Mr Jones in the course of his giving evidence before me for five days. I deal below with the defects in Mr Jones’ evidence, which were many. Nevertheless I was left with the view that Mr Jones did honestly believe when he signed the 1992 and 1993 representation letters that the statements in the letters were true and that his knowledge of BFS and its business was sufficient to give him reasonable grounds for signing the letters;
ii)	the second stems from an analysis of (a) the knowledge Mr Jones had, (b) whether that knowledge would cause another person in Mr Jones’ position to feel able to sign the letters, and (c) whether the defects in Mr Jones’ evidence should nevertheless cause me to hold that he was dishonest when another person would not have been. I develop this analysis below.
Could a reasonable finance director have signed the representation letters?
97.	I think it useful to start by considering whether a notional reasonable finance director, one of only two executive directors controlling BFS, not Mr Jones, but with the same knowledge as I have held Mr Jones had, could have signed the representation letters.
98.	In forming a view on this, I must take into account the nature of BFS’ operations during the 1992 and 1993 accounting periods and the matrix management system operated by the Barings group. The basis of this system was that Barings functioned on a global basis. Mr Leeson’s trading activities were supervised, as I have held Mr Jones to have believed, by Mr Killian from Japan in the 1992 accounting period and by him, Mr Gueler and Mr Ron Baker in 1993. Mr Leeson reported to Mr Bowser in London in relation to settlements between BFS and BSL, and Mr Bowser also had ultimate responsibility for settlement between BFS and BSJ of BSJ’s proprietary trading. 
99.	If Mr Killian, Mr Gueler, Mr Baker and Mr Bowser had been located in Singapore with their supporting staff, supervising Mr Leeson’s activities from within the same building rather than many miles away, what would have been the attitude of my notional finance director? Clearly there could have been no obligation on him to supervise Mr Leeson’s trading activities, or the settlement with clients of his trades. The finance director would have been entitled to leave that to the executives whose job it was, and there has been no suggestion that that was part of the BFS finance director’s job. As a finance director he would have been obliged to provide financial and administrative back-up, but not, for example, to scrutinise the daily activity statements recording BFS’ trading.
100.	Furthermore the finance director might have been entitled to assume, without specific enquiry by him, that, if those supervising the trading and settlement activities had not made him aware of any problems in their areas, there were no such problems. A finance director in those circumstances, before he signed the usual representation letters which were required at each annual audit, might well feel that he did not need specifically to ask each of his executives if they were aware of any problems in their areas. If the executives with responsibility for such matters had not reported any irregularities (representation 2), or drawn to his attention circumstances which might suggest that there were material errors or omissions in the records (representations 4 and 6(a) and (b)) or undisclosed liabilities (representation 9), he might well feel that there was no need to ask them if there had been any, even if he had no relevant knowledge arising from day-to-day supervision. 
101.	If that would be the case if Mr Killian, Mr Gueler, Mr Baker and Mr Bowser had been executives of BFS, given modern methods of communication, the situation should be no different because they were instead in Japan and London. It seems to me that the finance director could honestly have held the view that the faxed daily activity statements to Tokyo and computer feed to London would have allowed them to supervise Mr Leeson’s activities as efficiently as would reports or print-outs delivered within the same building: as I have mentioned, Mr Bowser was involved in specifying the feed he was to receive. 
102.	With the benefit of hindsight, it is likely that, if Mr Killian or Mr Bowser had been in the same building and asking questions, Mr Leeson would have been unable to practise his fraud, either at all or at least while his superior was in the room. But that is indeed the product of hindsight, and a finance director signing a representation letter might well not have realised that the distance separating Mr Leeson from those supervising him would have such disastrous consequences.
103.	Therefore I conclude that, whereas a notional finance director, in Mr Jones’ situation and with Mr Jones’ knowledge, might possibly have been negligent in not making specific enquiries of the specialist executives before signing the representation letters, there would be no reason to believe that, because he did not, he must have lacked any honest belief in the truth of the statements in the representation letters or have known that he had no reasonable grounds for making those statements.
Mr Jones’ evidence
104.	Mr Jones was an unsatisfactory witness. He was evasive and argumentative, and prone to accuse others of lying where their accounts differed from his. In certain respects his evidence before me differed from that given to the Singapore inspectors, and he admitted “moulding” his evidence to the inspectors in the light of the circumstances (though I am sure that all who were interviewed at that time shared Mr Jones’ tendency to distance himself as far as possible from Mr Leeson’s activities, and that Mr Jones’ answers to the inspectors reflected that tendency). 
105.	Mr Gaisman cross-examined Mr Jones at length in relation to his submission of BFS’ application to SIMEX to renew its licence in March 1994, his failure to implement the 1994 internal audit report, the failure to provide it to the auditors, Mr Leeson’s renewal of his SIMEX registration in December 1994, the SLK receivable in 1995 and his statements to this court with reference to his ability to come to this country to give evidence. Mr Jones’ evidence indicated that, in relation to at least some of those questions, he had, in order to achieve his own ends, withheld information, from auditors, the Singapore authorities or the court, which he should have disclosed.
106.	Likewise some of the justifications which Mr Jones put forward for signing the representation letters did not stand up to cross-examination. Thus he relied in his witness statement on ten visits which Mr Dickel made before, and ten after, BFS started trading, as a source of his information about BFS’ systems and justification for his belief that they were effective. In fact it is clear from Mr Dickel’s passport entries that Mr Dickel visited nine times before, and only once after, BFS started trading. Equally a number of the other visits from Barings management, on which he relied as giving him confidence that Mr Leeson was closely supervised from London, proved to be dubious or exaggerated.
107.	I have already expressed the view that a notional reasonable finance director, in Mr Jones’ situation and with Mr Jones’ knowledge, would not necessarily have lacked any honest belief in the truth of the statements in the representation letters or have known that he had no reasonable grounds for making those statements. Should I conclude that nevertheless Mr Jones lacked such honest belief or had such guilty knowledge, purely because he had a tendency on other occasions to withhold information so as to mislead auditors and others to further his own ends?
108.	I conclude that I should not. It is clear, from the evidence of Mr Mah, and even those within Barings (such as Mr Broadhurst) who found him difficult and wished to remove him from his post, that Mr Jones was a very able finance director. He was personally difficult, and prepared to be awkward. He worked extremely long hours for long periods, despite trying private circumstances. Those factors seem to be against Mr Jones having signed the representation letters fraudulently out of laziness. 
109.	Shortly before the crash, in early February 1995, Mr Jones showed himself prepared to mislead auditors in order to have the 1994 audit completed against a particularly tight deadline and in the light of awkward discoveries by the auditors relating to Barings’ star trader. However the 1992 and 1993 audits raised no difficult issues and the deadlines were no more than usually difficult to achieve. There was no pressure of circumstances tempting him to reckless fraud in order to get the audits through. So why should Mr Jones have committed such fraud?
110.	Mr Gaisman’s answer was that Mr Jones was anxious to conceal from the auditors and the regulators that he and Mr Bax were not, contrary to the belief of those persons, actively managing BFS’ business. Otherwise BFS would not have been allowed to continue operating as it was.
111.	One answer to that is that Mr Jones does not seem to have concealed his role (or lack of it) from the auditors. He said as much in evidence before me, and that is strongly corroborated by the evidence of Coopers & Lybrand Singapore (“C&LS”), who conducted the 1994 audit. Their Assessment of Control Environment form noted that “Level of involvement by the Board of Directors is assessed to be minimal – GM [i.e. Leeson] runs day-to-day operations”. C&LS’ audit manager told the Singapore inspectors that Jones had a general feel of the financial balances but was not hands-on and could not generally deal with any queries himself; it was Leeson, not Jones, who was in charge of the company. Mr Jones seems to have made no attempt to mislead C&LS as he is said to have misled D&T.
112.	A further point is that, when BFS was being established in 1992, Mr Bax and Mr Jones had submitted in a memorandum dated 25 March 1992 that Mr Leeson should report to, and only to, Mr Jones on operational matters. Mr Bax’s evidence was that they felt that Mr Jones should be given ultimate responsibility for BFS operations. If BFS did not have overall control of the settlement process, that would encourage mistakes and make it much harder for Mr Jones to supervise what was going on. 
113.	Mr Bax and Mr Jones lost that argument. However Mr Jones was an awkward character. It seems unlikely that he would have committed fraud in order to prevent D&T pointing out to Barings management that which he and Bax had pointed out to them unsuccessfully, only (in the case of the 1992 audit) nine months before.
114.	Accordingly there is no reason to conclude that Mr Jones’ unsatisfactory conduct in other later situations means that he must have had no honest belief in the representations contained in the 1992 and 1993 letters, given that a reasonable finance director with his knowledge and in his circumstances could have made such representations without it being concluded that he must have lacked such belief.
115.	Therefore, on the basis of the evidence adduced for the purposes of the preliminary issue, D&T have not established to my satisfaction that, when Mr Jones signed the representation letters, he did so:
i)	knowing that the statements in the letters were untrue, without an honest belief in their truth, or indifferent as to whether or not they were true, or
ii)	knowing that he had no reasonable grounds for making the statements, without an honest belief that he had such grounds, or indifferent as to whether he had or not.
OTHER LEGAL ISSUES
116.	That is sufficient to dispose of this preliminary issue. However the other legal issues set out in paragraph 37 above were fully argued before me. In deference to those arguments and in case this goes further, I shall express my views, albeit shortly, upon them, which may also be relevant to awards of costs hereafter. The discussion which follows is on the basis that, contrary to the finding I have just made, Mr Jones’ signature on the representation letters was recklessly fraudulent.
MATERIALITY AND INDUCEMENT
117.	Whether materiality is a requirement of an action in deceit was disputed before me. D&T argued strongly that it was sufficient for them to establish inducement. This is an area of academic dispute. Were it necessary for me to decide the question, I should incline to the view that materiality is at most an aspect of proving inducement and is not a separate requirement. I note in particular Lord Mustill’s statement in Pan Atlantic Insurance v Pine Top Insurance [1995] 1 AC 501, at page 533:
“…whereas, if the representation inducing a contract was … fraudulent, …its falsehood would invariably give a right to avoid, an innocent misrepresentation inducing the contract would give the underwriter a right to avoid only if it was material.”
118.	In any event I am satisfied that the representation letters were material, at least in the sense that D&T would not have signed their audit opinions on the statutory accounts without receiving them. 
119.	SAG 20, which I have quoted above, did not require auditors to obtain a representation letter, save in relation to matters for which other sufficient audit evidence could not be expected to exist, which was not the case here. But it recommended that “the possibility of misunderstandings between the auditor and management is reduced when oral representations are confirmed by management in writing” and attached a sample letter which was clearly the basis for those used by D&T. It stated that (at paragraph 14): 
“If management refuses to provide representations that the auditor considers necessary, this will constitute a limitation in the scope of his examination. In such circumstances, the auditor should evaluate any reliance he has placed on other representations made by management during the course of his examination and consider if the refusal may have any additional effect on his report.” 
120.	Mr Mason, BFS’ audit expert, expressed the view that the representation letters in this case were a formality, as D&T should have obtained from other sources sufficient evidence in relation to all the issues covered. However, in the light of the guidance quoted above, he admitted that refusal by management to provide a representation letter would cause an auditor to reconsider his opinion, and to examine whether the other evidence he had gathered was sufficient.
121.	Mr Mah gave evidence that he had obtained a representation letter from management in every audit he had conducted, save one where the client agreed to sign a memorandum prepared by D&T in place of a letter. He confirmed that, if they had not received satisfactory representation letters from BFS, D&T would not have signed unqualified audit reports in 1992 and 1993 and, in the case of 1992, would have withdrawn the opinion on the BSL consolidation pack which they had already given.
122.	Finally, Mr Jones in cross-examination agreed that he knew that receipt of the representation letter in each year was a necessary step without which D&T would not sign their audit opinion.
123.	In the light of this evidence, it seems clear that, by signing the representation letters, Mr Jones did intend to induce D&T to sign their audit opinions and that, as a matter of fact, it did so induce them.
CAUSATION
124.	D&T’s case on causation is that:
i)	there is no requirement in a deceit claim to prove causation, once inducement is proved, and
ii)	if there is such a requirement, D&T have clearly met the test of showing that the transaction which was induced by Mr Jones’ alleged fraud was a cause of D&T being exposed to a claim in negligence arising from the 1992 and 1993 audits. 
125.	I deal with these arguments in turn.
Is causation a requirement?
126.	I have held that the representation letters were material, in the sense that they induced D&T to sign their audit certificates and thus put their name to inaccurate financial statements. However that does not dispose of the issue of whether that action by D&T was the cause of the loss which is the subject of D&T’s cross-claim. 
127.	D&T submitted that there is no such requirement, and that in deceit claims it is sufficient to prove inducement. I reject this submission. It is clear from Smith New Court v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 that in deceit claims there is a requirement of causation over and above the requirement to prove inducement. This is evident from Lord Steyn’s speech at page 284. He there considered the case of Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, which established that in deceit there is a more generous rule for remoteness than in negligence cases, in that the victim is entitled to all the loss directly flowing from the transaction induced by the wrongdoer, without regard to foreseeability. However he then went on to say:
“So far I have discussed in general terms the scope of a fraudster’s liability in accordance with the rule identified in Doyle v Olby (Ironmongers) Ltd. It is now necessary to consider separately the three limiting principles which, even in a case of deceit, serve to keep wrongdoers’ liability within practical and sensible limits. The three concepts are causation, remoteness and mitigation.”
128.	Lord Steyn then went on to describe the tests for causation in a passage which I quote below, and to conclude that, because of the nature of the transaction into which Smith New Court had been induced to enter, the types of losses claimed were indeed caused by the fraud.
129.	I note also that in South Australia Asset Management Corporation v York Montague Limited [1997] AC 191, Lord Hoffmann commented at page 217 that:
“even if the maker of the fraudulent statement is liable for all the consequences of the plaintiff having entered into the transaction, the identification of those consequences may involve difficult questions of causation.”
130.	D&T rely on Downs v Chappell [1997] 1 WLR 426 as establishing that there is no requirement of causation in deceit beyond inducement. But when Hobhouse LJ in that case (at page 433) said that, as the plaintiffs had proved inducement:
“the judge should have concluded that the plaintiffs had proved their case on causation and that the only remaining question was what loss the plaintiffs had suffered as a result of entering into the contract…”,
he was clearly acknowledging the need to prove that the claimed loss had been caused by the transaction which the fraud had induced. 
131.	In this case the representation letters induced D&T to put their name to the statutory and consolidated accounts (or, in the case of 1992, not to withdraw their name from the consolidated accounts). That does not in itself mean that their loss was caused by their doing so.
Is causation established?
132.	The subject of D&T’s cross-claim for deceit is their exposure to, and (assumed) liability for, a claim for their (assumed) negligence in conducting the audits of BFS. D&T’s case is that, in a deceit claim, the claimant is entitled to recover all his loss directly flowing from the fraudulently induced transaction. In this case the “transaction” was signature of the audit reports. Applying the test of causation expressed by Lord Steyn in Smith New Court v Scrimgeour Vickers (see paragraph 134 below), that transaction was at least a cause of D&T’s liability. Although D&T’s assumed negligence in conducting the audits would also be a cause of that liability, Standard Chartered Bank v Pakistan National Shipping Corp (No. 4) [2001] QB 167 decides that, if the signature of the audit reports was a cause of the liability, then it is to be treated as the only cause. Thus D&T are entitled to damages in the same amount as their liability on the main claim, and the main claim fails for circuity.
133.	Therefore the question is whether the signature of the audit reports as a result of the allegedly fraudulent representation letters was a cause of D&T’s exposure to a negligence claim and therefore loss.
134.	In Smith New Court v Scrimgeour Vickers, after the passage I have quoted above, Lord Steyn stated at page 284:
“The development of a single satisfactory theory of causation has taxed great academic minds …. But, as yet, it seems to me that no satisfactory theory capable of solving the infinite variety of practical problems has been found. Our case law yields few secure footholds. But it is settled that at any rate in the law of obligations causation is to be categorised as an issue of fact. What has further been established is that the "but for" test, although it often yields the right answer, does not always do so. That has led judges to apply the pragmatic test whether the condition in question was a substantial factor in producing the result. On other occasions judges assert that the guiding criterion is whether in common sense terms there is a sufficient causal connection: see Yorkshire Dale Steamship Co. Ltd. v. Minister of War Transport [1942] A.C. 691, 706, per Lord Wright. There is no material difference between these two approaches. While acknowledging that this hardly amounts to an intellectually satisfying theory of causation, that is how I must approach the question of causation.”.
135.	In Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360, the audit clients sued their auditors for negligence. They alleged that (to quote from the headnote) “if the [auditors] had performed their duties with reasonable care and skill, the insolvency of the companies would have been shown and they would have ceased to trade immediately and subsequent losses would not have occurred.” Glidewell LJ asked (at page 1374H):
“How does the court decide whether the breach of duty was the cause of the loss or merely the occasion of the loss? The answer in my judgment is supplied by the Australian decisions to which I have referred, … in relation to a breach of duty imposed on a defendant whether by contract or in tort in a situation analogous to breach of contract. The answer in the end is “By the application of the court’s common sense.” Doing my best to apply this test, I have no doubt that the deputy judge arrived at a correct conclusion on this issue. The breach of duty by the defendants gave the opportunity to Galoo and Gamine to incur and to continue to incur trading losses; it did not cause those trading losses, in the sense in which the word “cause” is used in law.”
136.	While I am dealing here with a claim in deceit rather than contract or negligence, I think this approach is equally applicable. There are respects in which the rules as to causation and remoteness in deceit differ from those in negligence, but the basic appeal to common sense and the distinction between cause and occasion of the loss apply to both.
137.	In Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22, Lord Hoffman took a more policy-based approach. He said at page 29:  
“The first point to emphasise is that common sense answers to questions of causation will differ according to the purpose for which the question is asked. Questions of causation often arise for the purpose of attributing responsibility to someone, for example, so as to blame him for something which has happened or to make him guilty of an offence or liable in damages. In such cases, the answer will depend upon the rule by which responsibility is being attributed. …”
138.	Having considered various factual examples, Lord Hoffman continued at page 31:
“These examples show that one cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule. Does the rule impose a duty which requires one to guard against, or makes one responsible for, the deliberate acts of third persons? If so, it will be correct to say, when loss is caused by the act of such a third person, that it was caused by the breach of duty. In Stansbie v. Troman, Tucker L.J. referred to a statement of Lord Sumner in Weld-Blundell v. Stephens, in which he had said: 
"In general, even though A is in fault, he is not responsible for injury to C which B, a stranger to him, deliberately chooses to do. Though A may have given the occasion for B's mischievous activity, B then becomes a new and independent cause." 
Tucker L.J. went on to comment: 
"I do not think that Lord Sumner would have intended that very general statement to apply to the facts of a case such as the present where, as the judge points out, the act of negligence itself consisted in the failure to take reasonable care to guard against the very thing that in fact happened."
Before answering questions about causation, it is therefore first necessary to identify the scope of the relevant rule. This is not a question of common sense fact; it is a question of law. In Stansbie v. Troman the law imposed a duty which included having to take precautions against burglars. Therefore breach of that duty caused the loss of the property stolen. In the example of the vapour-filled drum, the duty does not extend to taking precautions against arsonists. In other contexts there might be such a duty … but the law of negligence would not impose one.” 
139.	In the light of these authorities, it seems to me that, under the head of causation, I need to have regard to both Lord Steyn’s test – was the alleged deceit a substantial factor in producing D&T’s liability? - and Lord Hoffman’s regard for “the purpose and scope of the rule”, responsibility under which is to be attributed. 
140.	As Lord Steyn says in Smith New Court, the “but for” test does not always yield the right result, and the right approach is more the pragmatic one of whether the condition in question was a substantial factor in producing the result. In an action in deceit, as he points out at page 283C, “the plaintiff is entitled to recover all his loss directly flowing from the fraudulently induced transaction”. Lord Steyn contrasts this with the rule in cases of negligent misrepresentation, where the plaintiff may recover only loss flowing from the misrepresentation. In other respects, the test for causation in deceit does not differ from that applicable to other torts.
141.	Mr Brindle for BFS submitted that the substantial cause of D&T being sued for negligence in conducting their audits was D&T’s negligence in conducting those audits: their failure, in carrying out their audit investigations, to obtain audit evidence which would have enabled them to detect Leeson’s illicit activities. By contrast, D&T’s act of signing the audit opinions was no more the substantial cause of their liability than the fact that they were appointed as auditors in the first place. Like their appointment, that act exposed them to the possibility that, if they were negligent, they would be liable to BFS. He submitted that that is not enough to render signature of the opinions a substantial cause of D&T’s liability.
142.	Mr Brindle relied upon Galoo Ltd v Bright Grahame Murray, which I have quoted above, and also Quinn v Burch Bros. (Builders) Ltd [1966] 2 QB 370 and Banque Keyser Ullman v Skandia Insurance Co [1991] 2 AC 249 as cases in which the defendant’s tort clearly created the occasion for the loss but was held not to be the operative cause of it. He submitted that is the position here: signature of the accounts was a necessary precondition to D&T’s liability but the substantial cause of that liability was their negligence in conducting their audit. If it had not been for that negligence, D&T would have discovered Leeson’s frauds, would have known that the representation letters were false when they received them, would not have signed off on the accounts and would not have been liable to be sued in the present proceedings. 
143.	I have some sympathy for this argument. However, as a matter of common sense, it seems to me impossible to say that D&T’s signature of the accounts (which was the relevant transaction flowing from the fraud) was not a cause of their being sued for negligence, even though their negligent investigatory work may have been a more significant cause. I note that one of the particulars of negligence pleaded by BFS (at paragraph 73(o) of the Re-amended Statement of Claim) is that D&T:
“gave unqualified reports on the Plaintiff’s financial statements and the group consolidation package notwithstanding the matters aforesaid and the fact that they did not show a true and fair view…”
144.	The fact that BFS’ cause of action had accrued before the certificates were signed is irrelevant, given that I am considering D&T’s cross-claim for an amount equal to the claim against them: that cross-claim was only complete, so as to extinguish BFS’ claim, once BFS had incurred its fraudulently induced trading losses, long after the certificates had been signed. 
145.	One can speculate what would have happened if D&T had not signed the audit certificates. Maybe Mr Jones would have been required to carry out the checks necessary to allow him to sign the representation letter, maybe there would have been a further audit. But it must be quite likely that the end result would have been that D&T would not have been exposed to a claim in negligence by BFS. Therefore it must follow that signature of the audit certificates was a cause of their exposure.   
146.	I reach the same conclusion when I follow Lord Hoffman’s injunction to look at the policy of the rules concerned. No doubt the purpose of the rule allowing a company to sue its auditors in respect of a negligent audit is to allow the company (and through the company its shareholders) to recover losses which it has suffered as a result of the auditors failing to discover fraud or error. Had I found Mr Jones to have been fraudulent, it would be of concern to me that D&T were able to escape liability completely, as a result of a reckless representation letter written by the very management which had prepared the financial statements which D&T were appointed to verify and concerning whose conduct of the company’s affairs D&T were appointed to provide shareholders with reliable intelligence. This view underlay the judgments of Moffitt J in the Australian cases of Pacific Acceptance Corporation v Forsyth [1970] 92 WN (NSW) 29 and Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322, and it finds echoes in Carnwath J’s approach in British Racing Driving Club v Hextall Erskine [1996] 3 All ER 667, to which I refer below. 
147.	However I must also take into account the policy of the rule allowing a victim who has been deceived to sue his deceiver. The judgments in Standard Chartered Bank express very clearly the policy of the common law in relation to deceit. One could hardly have a clearer statement of policy than Ward LJ’s words at paragraph 126:
“Commercial fraud must be condemned. It can only properly be condemned by an award of the whole of the damage which the defendants intended to cause. Highwaymen in commerce forfeit the right to just and equitable treatment. In my judgement in the law of deceit there is to be no apportionment.”
148.	Accordingly, with some regret, I do not see that it is open to me to find, taking account either of a common sense approach to factual causation or of the policy of the rules concerned, that D&T’s signature of the audit certificates induced by the representation letters was not a cause of D&T’s liability.
Multiple causes
149.	It is common ground that, if D&T’s signature of the audit certificates was induced by fraud and was a cause of D&T’s liability to BFS, it is to be treated as the only cause: see Standard Chartered Bank.
VICARIOUS RESPONSIBILITY
150.	Mr Jones signed the representation letters on BFS’ letterhead, as a director of BFS.  On the face of it, he did so in the course of his employment and within the scope of his implied authority from the company.  
151.	That being so, D&T submitted that BFS was responsible for Mr Jones’ acts, in accordance with the rule in Lloyd v Grace Smith & Co [1912] AC 716. BFS should be liable to a third party for such acts whether or not the director was acting fraudulently and whether his fraud was for the company’s benefit or not.  
152.	Initially Mr Brindle for BFS relied on two arguments in response to this: an argument that D&T were insiders, not outsiders; and an argument based on the rule in Re Hampshire Land Company [1896] 2 Ch 743.  Mr Brindle abandoned the latter argument in the course of submissions.  
153.	Mr Brindle’s former argument was to the effect that D&T were officers of BFS, together with Mr Jones, its director, and therefore insiders.  The rule in Lloyd v Grace Smith & Co governs liability of a company for the acts of its agents within the scope of their authority as they impact on outsiders only.  Thus BFS was not to be made liable for Mr Jones’ fraud by means of the rule.  Mr Brindle relied upon Meridian Global Funds Management v Securities Commission [1995] 2 AC 500 as authorising the court to fashion a special rule of attribution in such circumstances.  He pointed to British Racing Driving Club v Hextall Erskine [1996] 3 All ER 667 as a recent such case: the court there held that directors’ actions were not to be attributed to a company because to do so would defeat the statutory purpose of section 320 of the Companies Act 1985.  
154.	Mr Brindle pointed out that, in the present case, BFS’ directors owed a duty to the company under section 201 of the Singapore Companies Act to lay before the company in general meeting financial statements that give a true and fair view of the company’s affairs; and that D&T owed a duty to the company under section 207 of that Act to report to the company in general meeting whether the financial statements did give such a view.  As in the British Racing Driving Club case, it would defeat the purpose of those sections if the company’s claim against the auditors for negligence in performing their duties in connection with the audit could be defeated by making the company liable for the directors’ defaults in the same connection.  
155.	I am unable to accept that auditors are to be treated as “insiders” in their relationship with their audit-client company.  There is no English authority for any such concept.  By contrast, however, in Duke Group Limited v Pilmer [1999] SASR 64, in the full court of the Supreme Court of South Australia it was held that, for the purpose of a defence of contributory negligence by accountants to a claim by their client company in negligence, the client company was held to be liable under the rule in Lloyd v Grace Smith & Co and thus at fault for the fraudulent representation of the client’s directors.  The accountants were not acting as auditors but had been specially employed by the company to advise a general meeting of the shareholders of the company as to the merits of a proposed takeover.  See also Daniels v Anderson (1995) 16 ACSR 607 at page 725, an audit case in the New South Wales Court of Appeal. See also Mid - Continent Paper Converters Inc v Brady, Wear & Schoenfeld Inc 715 NE 2nd 906, a decision of the Indiana Court of Appeals in 1999 in which the fraud of a director, who misled the company’s auditors for the benefit of the company, was imputed to the company so as to bar any claim in negligence by the company against the auditors.  BFS’ acceptance that the defence of contributory negligence is available to D&T also seems to me to be inconsistent with this submission.  
156.	Nor do I accept that the Meridian case justifies me in disapplying the normal rules of vicarious liability in circumstances such as these. In his discussion of rules of attribution in that case, Lord Hoffmann began by saying, at page 507:- 
“ The company’s primary rules of attribution, together with the general principles of agency, vicarious liability and so forth, are usually sufficient to enable one to determine its rights and obligations.  In exceptional cases, however, they will not provide an answer…” 
157.	It does not seem to me that Lord Hoffmann in his speech in the Meridian case was deciding that, where the facts established that the director of a company was acting within the scope of his authority, it was open to a court to disapply the rule of vicarious liability so as to make the company not liable for those acts.  It matters not that the actions of the director were done with some fraudulent intent, see Duke v Pilmer ibid, unless the fraud has the effect of undermining the conclusion that he was in fact acting within the scope of that authority.  
158.	Contrary to Mr Brindle’s submission, the decision of Rix J in Arab Bank v Zurich Insurance [1999] 1Lloyds Reports 262 does not seem to me to be a case where the judge was disapplying the rule of vicarious responsibility where it would otherwise have applied on the facts of the case.  He was seeing whether he could be assisted in deciding the case before him by applying the rule by analogy and finding that it did not fit.  
159.	The British Racing Drivers Club case does support Mr Brindle’s approach to Meridian. However with great respect to Carnwath J, whose decision in that case seems justified on the facts, I do not believe that Meridian does allow me to disapply the rule of vicarious liability, in reliance upon the statutory context of duties under the Companies Act, in the way in which the judge did there and Mr Brindle would have me do here.
160.	Accordingly, had I found Mr Jones’s action in signing the representation letters to have been recklessly fraudulent, I should have held that BFS was vicariously liable for his action.
CONCLUSION 
161.	In the result I answer the question posed by the preliminary issue in the negative sense and contrary to the submissions of D&T.