Supreme Court abandons investors in Livent decision, part I

TORONTO – On December 20, 2017, just before the holidays, the Supreme Court of Canada (SCC) quietly released another surprising chapter in the soap opera of investors vs. “poor victimized external auditors.” As in 1997, when the SCC ruled on Hercules Managements Ltd. v. Ernst & Young, the SCC’s decision on Deloitte & Touche v. Livent Inc., largely handed the Canadian audit profession another unwarranted victory.  No stern, comprehensive warning was sent by the SCC. 

Too strong a criticism, you say? Not if you add up the multiple billions of dollars that financial fraudsters extract out of Canada each decade, while many regulators and auditors merely turn the other cheek.  Seriously, why aren’t there more executives in jail? No prosecutions is just one reason.  

In this, the first of three consecutive daily columns on the SCC’s decision, I will sketch out my initial reaction before going into the details of the Court’s decision. But suffice to say that Canadian lawmakers have yet to overturn decades of SCC auditor-protection biases, nor have they withdrawn auditors’ full control over the comparatively poor quality of financial reporting in Canada. 

Provincial securities commissions also have a long-proven record of ineffectiveness; yet, they freely claim otherwise. The lengthy string of fiascos such as Nortel, business income trusts, Sino-Forest, Poseidon and dozens more speak for themselves. This century’s investor losses continue to be huge before we even count the coming collapse of marijuana companies. 

Why-oh-why has the SCC provided protection to those who may aid the prolongation of financial scams? In the Livent decision, the SCC came very close in its 4-3 vote to letting Deloitte & Touche go completely free. What was the SCC thinking?  Instead of considering a broad outlook of Canada’s worsening securities picture, the SCC stuck with narrowly defined pleadings in the case. 

Lawmakers must create a national securities agency

In my next two columns, I will address where the SCC’s reasoning missed crucial steps. Tomorrow’s column responds to the obsolete, artificial and hypothetical SCC belief about the purposes of annual audited financial reporting. The Canadian posture changed after about 1980; yet, the 1997 and 2017 SCC decisions are contrary to what auditors proclaim to be their role — what is advertised to the public is not what is said in court. 

In part three I will address the strange line of reasoning that the SCC utilized in totally rejecting Livent’s prospectus claim. Securities law and auditor practices apparently were abruptly cast aside for reasons that are not credible. Investors who buy based on a prospectus offering have traditionally been given additional information beyond an annual audit. The prospectus purpose was clear and not a mystery.  Has this concept been watered down or cast aside by the Livent decision? 

Trying to strike a balance between fairness to investors as well as to corporations, management, employees and others is difficult. Since 1997, the major decline of securities reporting litigation in Canada tells you all that you need to know — investors’ rights have been decimated. Pursuit against those who have manipulated profits and cash flows of corporations has become futile.  

Yet, here we are, 20 years later, and three of seven Supreme Court Justices voted to retain the 1997 state of annual financial reporting. Worse, seven out of seven apparently made financial recoveries for misleading prospectus reporting very difficult or impossible. This is hardly a fair attempt to restore the investor rights that were dislodged in 1997. 

In my opinion, the SCC moved backward in time in 2017. The financial damages that repeatedly occur in Canada are not mere “bad luck.”  Canada’s oversight and controls in the securities industry and its financial reporting are too easy to circumvent. We need a national securities enforcement agency to counteract the imbalance of power. 

Tomorrow, the faulty reasoning behind “supervising management.” The views and opinions expressed by contributing writers to Canadian Accountant are their own. Canadian Accountant and its parent company bear no responsibility for the accuracy and opinions of contributing writers. 

Dr. Al Rosen, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE, provide independent, forensic accounting investment research. They are the co-authors of Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth. Learn more at Accountability Research Corporation and Rosen & Associates Limited.