Source: https://www.bccpa.ca/news-events-publications/publications/cpabc-in-focus/2018-issues/november-december/cpabc-in-focus/features/
Timestamp: 2019-04-20 02:20:46+00:00

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On May 31, 2018, Chris Sainsbury presented “Infrastructure Resilience: Are You Ready?” at the annual conference of the Government Finance Officers Association of British Columbia. In the following article, he and colleagues Ross Ryken and Alexandra Hewitt explain why infrastructure resilience is a major concern not only for the public sector but for the private sector as well.
Canada, like the rest of the world, is facing disruption on an unprecedented scale. The global climate is shifting, mass urbanization is on the rise, automation is reshaping the labour market, and the pace of development is increasing. As detailed in KPMG’s 2018 Emerging Trends in Infrastructure report, these are some of the trends that will have a dramatic impact on the infrastructure landscape in the years to come.
Increasingly, public and private organizations are realizing the importance of infrastructure resilience. Resilience, as a concept, is the capacity of individuals, communities, institutions, businesses, governments, and systems within a city to survive, adapt, and grow amid major upheaval. This capacity stems from preparedness—a truly resilient city is one that has the capacity to thrive in spite of both acute shocks and chronic stresses.
Acute shocks are sudden events, such as natural disasters, disease outbreaks, acts of terrorism, and infrastructure failure. These are the events that often spring to mind when people think about resilience. Yet, equally relevant are longer-term chronic stresses such as housing affordability, unemployment, aging infrastructure, and commodity supply/demand. These chronic stresses are particularly pertinent in a province like British Columbia, which is struggling with soaring house prices, increasing poverty (especially in Indigenous communities), and an opioid crisis.
Policy-makers and governments in international cities like Vancouver, Boston, and London are leading the charge to develop resilience strategies, and private corporations are beginning to follow suit. As shocks and stresses become harder to ignore, it’s expected that leaders in both the public and private sectors will place increasing emphasis on resilience planning.
There were only 3 megacities in 1975. Now there are 33.
When you consider that urban centres already account for 60% of global GDP5 and 60-80% of global energy consumption,6 it’s clear that this ongoing urban shift will have major implications for both governments and businesses—here in Canada and around the world.
As with mass urbanization, the stress caused by automation will be felt by governments and businesses alike, so leaders in both the public and private sectors will need to better plan and prepare for future disruption.
1 United Nations, Department of Economic and Social Affairs, Population Division (2006), World Urbanization Prospects: The 2005 Revision (working paper no. ESA/P/WP/200), un.org.
2 United Nations, Department of Economic and Social Affairs, World Urbanization Prospects: The 2018 Revision – Key Facts, un.org.
4 United Nations, Department of Economic and Social Affairs, World Urbanization Prospects: The 2018 Revision – Key Facts, un.org.
The concept of resilience remains relatively new. Early initiatives, such as the Kyoto Protocol (adopted in 1997), isolated and addressed aspects of resilience related to climate change. Recent initiatives have taken a more holistic approach to resilience, broadening sustainability to include financial, operational, technological, and social concerns as well as environmental ones.
To date, the 100RC’s City Resilience Framework (CRF) has been adopted by 100 major cities around the world, including the Canadian cities of Calgary, Montreal, Toronto, and Vancouver.12 With the CRF as a guide, these cities are leading the charge toward comprehensive resilience planning at a municipal level. Although still in its infancy, this framework has already served as a catalyst for change, elevating the importance of resilience to city councils and corporate boardrooms around the world. In short, 100RC has effectively placed the concept of resilience on the map.
Corporations, too, are beginning to think in terms of resilience, albeit to a lesser extent than municipal governments. Some multinational corporations have implemented climate change strategies designed to help them survive, adapt, and grow in a world challenged to reduce greenhouse gas emissions,13 while others have tackled IT resilience, developing strategies to maintain acceptable service levels no matter what challenges arise.14 Still, few—if any—corporations have developed and deployed a comprehensive organization-wide resilience strategy.
Going forward, public and private organizations that want to survive, adapt, and grow will need to sharpen their focus on resilience planning. This will require brave, forward-thinking leadership, as structural barriers will be encountered along the way and difficult decisions will have to be made. Structural barriers include budget constraints, a lack of resources and/or expertise, siloed departments, and a short-term mindset. Siloed departments can be particularly problematic, as effective resilience planning must, by necessity, span the entire enterprise. Likewise, short-term thinking (tied, for example, to one election cycle or fiscal year at a time) is a sure-fire way to hinder effective resilience planning.
Vision and leadership: A long-term vision for the organization, stemming from the leadership team and enacted at every level, will ensure that the whole organization is on the same page, and that each individual is working toward the same goals.
Effective strategy and policies: Buy-in from executives across the organization will be needed to ensure that each department and individual employee is aware of the overall strategy, and that the policies are in place to make this strategy a reality.
Collaboration: Open communication is necessary to break down silos and encourage co-operation and collaboration across departments.
The right organizational attitude: Changing the mindset of an entire organization requires careful planning and management from the leadership team.
The right people: An evolving skill base with the right competency, capacity, and capability will be needed.
Many organizations will find that they must first work on one or more of these enablers before they can effectively take on the task of resilience planning.
The public sector, led by 100RC cities, is well on the road to building enablers for resilience. Due to differing priorities (such as profit maximization versus social objectives), the private sector is farther behind, and few businesses are taking a similarly holistic approach. With global trends like mass urbanization and automation driving acute shocks and chronic stresses, forward-thinking government and business leaders would be wise to adopt infrastructure resilience planning now to ensure that their organizations have the capacity to survive, adapt, and grow well into the future.
11 See: 100resilientcities.org/about-us, accessed October 2, 2018.
13 ConocoPhillips, “Talking Action on Climate Change,” accessed October 2, 2018.
​14 Deloitte, “How to Create IT Resilience,” The Wall Street Journal, April 1, 2013.
Chris Sainsbury is the national infrastructure lead for smart cities in KPMG Canada’s Global Infrastructure Advisory team. He is a chartered civil engineer and project management professional with over 18 years of experience in the construction industry.
Ross Ryken is a consultant in KPMG Canada’s Global Infrastructure Advisory team. He began his career as a field engineer for large oil & gas, mining, and transportation projects and now specializes in infrastructure strategy and capital projects.
Alexandra Hewitt is a senior consultant in KPMG Canada’s Global Infrastructure Advisory team. She specializes in strategy development for high-profile infrastructure investments, with a focus on transportation.
To download a copy of KPMG’s 2018 Emerging Trends in Infrastructure report, visit kpmg.com.
In the following article, legal expert David Wende explains the complexity of the Livent decision and offers some practical advice for auditors in British Columbia.
With its December 20, 2017, decision in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (Livent), the Supreme Court of Canada (SCC) changed the law of British Columbia regarding auditor liability. As a result of this decision, auditors could now be held liable to their corporate clients for failing to discern the deliberate deceit of their clients’ directing minds. In addition, the SCC permitted creditors, otherwise without a remedy owing to an earlier SCC decision, to sue the auditor in the name of the client through a receiver, and it held that the auditor could be liable for the loss in value of the corporate client between the time when the auditor should have discovered the fraud versus when it was later discovered.
The Ontario trial judge in Livent found that the directing minds of Livent Inc., in concert with the company’s internal CFO, began to manipulate Livent’s financial statements in 1991, presenting them for audit in a manner deliberately designed to deceive the auditor, Deloitte. It was not until the summer of 1997 that Deloitte learned these quarterly financial statements could not be correct. However, the firm did not attribute the errors to ongoing internal fraud—instead, it assisted Livent in preparing a positive press release and provided a “comfort letter” to securities regulators to aid the company in obtaining additional equity investment. Moreover, in April 1998, Deloitte released a clean audit opinion on the company’s fraudulently overstated 1997 financial statements.
In 1998, Livent brought in new management, and it was they who discovered the material accounting errors that subsequently caused Deloitte to withdraw its 1997 audit opinion. In November 1998, Deloitte issued a new opinion on the company’s 1997 restated financial statements that prompted Livent to seek insolvency protection. The creditors, through the company receiver, sued Deloitte in the name of Livent Inc.
Had this claim been brought in British Columbia, it should have failed at the trial level. In Hercules Managements Ltd. v. Ernst & Young , 2 SCR 165, the SCC significantly limited the negligent auditor’s liability to those persons whom the auditor could reasonably foresee relying on the audit opinion, provided the audit opinion was used for the specific purpose for which it had been rendered. Since the Livent audit was intended to comply with company law alone, and not for the creditors’ benefit, the creditors had no claim against Deloitte.
In International Culinary Institute of Canada, Inc. v. Grant Thornton LLP, 2010 BCSC 541, I persuaded the BC Supreme Court (BCSC) that this limited purpose test applied equally to the company. The creditors’ “end run” around Hercules—employing the receiver to sue Deloitte in Livent’s name—should also have failed at the trial level in BC.
In 1985, the SCC held that since a company can only act through its directing minds, any criminal or fraudulent acts on the part of these directing minds were attributable to the company itself. The BCSC applied this same reasoning in the case of Hart Building Supplies Ltd. v. Deloitte & Touche, 2004 BCSC 55, finding that the fraud of the directing minds of the audit client should be attributed to the company, thereby precluding the company from seeking recovery from the auditor for failing to detect said fraud. In light of a subsequent SCC decision in Bhasin v. Hrynew, 2014 SCC 71, this outcome made sense.
In Bhasin, the SCC held that within every contract is a duty of honest performance by the parties to that agreement. The corporate defendant, having acted through its directing minds, was held liable for its dishonest dealings with the plaintiff (Mr. Bhasin). Thus, if Livent had similarly breached its contractual obligation to deal with its auditor honestly, shouldn’t this breach have precluded it from seeking a remedy for its own fraud? Not according to the Ontario courts, which rejected the Hart defence. Livent’s obligation of honest performance in its engagement with Deloitte under Bhasin was never even considered.
At trial and on appeal, the lower Ontario courts held that Deloitte did not meet the standard of care expected of an auditor when it failed to discover the ongoing fraud and act on that discovery in August 1997, and again when it issued its auditor’s report on Livent’s 1997 financial statements in April 1998. Damages in the amount of $84,750,000 (less 25% for contingencies) were awarded against Deloitte; the figure was based on the difference between Livent’s value in August 1997 and its value at the time of insolvency.
In its 4:3 decision, the SCC majority overruled Hart on public policy grounds, stating that “the very purpose of a statutory audit is to provide a means by which fraud and wrongdoing may be discovered” and that it would be “perverse” and “would render the statutory audit meaningless” to protect the auditor from negligently failing to find fraud.2 In undertaking this “duty of care” analysis, the SCC did not refer to its earlier decision in Bhasin and made no attempt to explain why Livent’s breach of its duty of honest performance in the audit engagement did not protect Deloitte in contract. This is important because, as discussed under “Practice points” below, contractual rights in your engagement letters can define and limit any potential liability to your clients.
Insolvency law has long permitted a receiver or trustee in bankruptcy to bring proceedings in the name of the company for the benefit of its creditors. At issue in Livent was whether this form of proceeding could prevail over the substantive philosophy of Hercules under which Deloitte would have owed the creditors no duty of care. The SCC found that it did not matter that procedural insolvency law had been employed to circumvent the protection afforded to auditors under Hercules, because it held that it is irrelevant who causes the company to come before the courts. The SCC also agreed that if the corporate client’s value diminishes between the time when a reasonable and prudent auditor applying generally accepted auditing standards would have discovered the fraud and the time of its eventual discovery, the decline in value is recoverable against the negligent auditor. This could have huge ramifications—especially if a company goes from success to insolvency during that period.
The silver lining in Livent? All seven of the SCC judges affirmed that Hercules otherwise remains the law and applies equally to the company itself. Therefore, since the purpose of Deloitte’s August 1997 comfort letter was not to uncover fraud, no liability could follow under the Hercules principles. However, with the SCC having now imposed on the statutorily appointed auditor the purpose of uncovering fraud for the benefit of the company as a matter of law, a claim by the company for negligently failing to do so fell squarely within the Hercules principles. As a result, Deloitte was still held liable; however, the amount was reduced (after a further 25% reduction for contingencies) to $40,425,000, representing the decline in Livent’s value between the time when the original auditor’s report was issued in April 1998 and when the new auditor’s report was issued seven months later.
​1 From “Livent Decision and the Profession.” This and other CPA Canada perspectives on the Livent decision can be found at cpacanada.ca (enter “Livent” in the search field). As detailed in “Assessing Deloitte v. Livent,” CPA Canada “intervened in the Livent case to ensure that issues affecting the broader public interest were fully considered.” Its work in monitoring the consequences of the Livent decision is ongoing.
2 See paragraph 103 of the SCC ruling.
Aside from underlining the importance of maintaining high professional standards and skills, the fundamental risk management lesson to be learned from Livent is the importance and power of engagement letters to limit an auditor’s liability in any kind of engagement. In 1997, the then-Institute of Chartered Accountants of Ontario would not permit auditors to limit their liability to clients within their engagement letters. Times have changed.
In Felty v. Ernst & Young LLP, 2015 BCCA 445, the BC Court of Appeal rejected any policy arguments against CPAs contractually limiting their liability to their clients. In the Felty case, EY had—wisely—refused to accept the engagement unless the client accepted its liability limits. Because EY had given the client the choice and opportunity to seek the assistance of another accounting expert, our BC trial and appeal courts held that the client was bound to the limitation of liability terms set out in the firm’s engagement letter.
What should you do if you’re an auditor in BC? I recommend that you include limitation of liability terms in your engagement letters; specifically, limit the amount you can be sued for and the time in which a claim may be brought against you. Refuse to proceed with any assurance engagement unless those terms are accepted by your client. Drawing the limiting terms to your client’s attention while there is still enough time for the client to go elsewhere for its professional accounting services, or—better yet—permitting the client to negotiate higher liability limits, should render the monetary limit in a properly drafted engagement letter unassailable in a court of law.
Given that your purpose now in any statutory audit is to provide a means by which fraud may be discovered, why should you alone be answerable to the company, and not those in senior management who perpetrated the fraud, or those serving on the company’s board of directors, if the board failed to properly supervise management? Consider including within your audit engagement letters a term further limiting your liability severally to your proportion of the company’s losses caused by all wrongdoers, including, specifically, its management and board. And for assurance engagements other than statutory audits, consider excluding liability for such fraud.
Including these protections in your engagement letters will significantly limit your exposure to creditors or shareholders who might otherwise use insolvency and corporate law to bring action against you in the name of your client.
Finally, to readily avail yourself of the protection under Hercules, ensure that you record in your engagement letter the limited purposes for which the assurance report may be used. Where possible, also stipulate in the engagement letter that you reserve the right to include a “Restriction on Use” in your assurance report—one that limits those who may lawfully rely on this report. Note that if the engagement letter does include a restriction on distribution or the use of the auditor’s report, an “other matters” paragraph, as required by Canadian Auditing Standard (CAS) 706 (Restriction on distribution or use of the auditor’s report), should be included with a corresponding disclosure in the engagement letter regarding the expected form and content of the auditor’s report.
David Wende is a recently retired lawyer who devoted much of his professional career to serving the accounting profession. Today he provides mediation and arbitration services in matters requiring an understanding of both legal and accounting principles. He also chairs the board of directors for McElhanney Consulting Services Ltd., an engineering and geomatics company with offices throughout Western Canada.

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