" 546. ... CPA Aviel is the accountant who audited the financial statements of the funds, and as such he is a significant gatekeeper for the recipients of the reports. Reason will not tolerate a situation in which the auditing accountant waives the examination of the existence of basic references to the existence of assets of a considerable value in the audited entity, due to the reputation he attributes to the audited entity or its manager. CPA Aviel should have audited the funds' financial statements in accordance with the standards required of an auditing accountant, as I detailed above, and not deviated from them downwards due to his familiarity with Segal and his conduct."
- However, I will clarify that this quote does not make an accurate distinction between the cases, since the warning lights that existed in the Mendzitzky case, such as conduct in related companies, are different from the case before us, in which, according to the investigator's report, all the parties involved were aware of the situation, as the dispute of responsibility in the investigator's report emerges: the state as the controlling shareholder of the company (investigator's report, pp. 262-270); the production councils (ibid., pp. 271-272); Tnuva (ibid., p. 273); the company's CEO from 1994 to 2010, Mr. Shlomo Tirosh (ibid., pp. 274-276); the conduct of the Board of Directors and the Chairman of the Board of Directors, Yaakov Tzur (ibid., pp. 276-281); Fahn Kanna, CPA, which served as Agrexco's accounting firm from its inception in 1956 until 2006 (ibid., at pp. 281-282); Chairman of the Board of Directors Yuval Oren (ibid., at p. 282); and the company's CEO as of September 2010, Mr. David Bondi (ibid., at p. 283). I will address the issue of awareness later.
- Further to the examination of the scope of the tests, it appears that the Audit Facility (Israel) 500 regarding audit evidence (hereinafter: "Audit Standard 500"), which is quoted in the opinion of the defendant's expert Morad (at p. 5 of the Morad Opinion, in paragraph 5.1), shows that contracts are part of the audit evidence. Thus, in section 4 of the Audit Standard 500 (my emphasis, M.A.):
"Accounting records include, typically, the records of the initial accounting operations and auxiliary records such as checks and records of electronic money transfers, invoices, contracts, masterbooks and reference books, journal entries, and other adjustments to the financial statements that are not reflected in the formal journal entries and records such as worksheets and spreadsheets that assist in cost allocation, calculations, account reconciliations, and data disclosure. Often, the transactions in the accounting records are created, recorded, processed, and reported by electronic means. In addition, the accounting records may serve as part of integrated systems that use shared data and assist in all aspects of the audited entity's financial reporting, operations, and compliance with the rules."
- Therefore, it emerges that the defendant, as the auditing accountant, did not gather sufficient and appropriate audit evidence to establish the accounting handling of the special payments, and in particular did not examine the existence of contracts or other supporting indicators to verify the registration of the special payments as an asset. At the very least, an independent sample examination of the growers was required, which could have expressed "inquisitive thought" that was not satisfied with the management's presentations.
- After considering the opinions and testimonies regarding the nature of the audit work, CPA Mored's opinion has significant evidentiary weight as it is the only one that relies on the working papers and audit procedures that were actually carried out in the years 2008-2010, but I accept CPA Aviv's audit at points where material gaps were presented in the collection and documentation of evidence, including the lack of working papers for 2007, reliance on management representations without external verification or sufficient samples. and the lack of an indication of a real examination process of the claim that the number of growers has not decreased; And Ronen's opinion, although she supports the conclusions regarding the impropriety in financial reporting, has limited weight in this section as it deals mainly with financial accounting and not with audit procedures. Therefore, my conclusion is that on the one hand, it has been proven that certain audit procedures have been adopted and even demands for reductions in certain years have been raised, and on the other hand, specific and substantial deficiencies have been proven in the audit evidence and documentation, especially where the decisions were based on management representations without sufficient verification.
- Notwithstanding the connection between the matter and the nature of the audit work, I will discuss the issue of the need for a reservation or a negative opinion and the substance of the deficiencies in the framework of the discussion below in a causal and damage connection, in order to avoid a double discussion.
Causal connection and damage
- As stated above, I have determined that it was not possible to record the special payments as an asset, in accordance with the factual circumstances and the definition of "asset" in the accounting sense in the relevant accounting standards; In addition, with regard to the audit of the reports, I was under the impression that it was possible to do more professional work, especially with regard to examining contracts and signed agreements, and not relying solely on the management's representations.
- However, the plaintiff must also prove that the auditing accountant should have expected that the creditors or the company would rely on the registration of the special payments as an asset and act accordingly; that the auditor should have expected that damage would be caused to the plaintiff; and that the creditors or the company actually relied on the representation, and as a result they suffered damage. I will preface the beginning, and note that with regard to all the last questions, the plaintiff has not been able to meet the burden of proof imposed on him in order to meet the conditions for imposing liability for the conduct of the auditor. I will explain my assertions below.
Factual Causal Connection: "The Imperfect Test"
- The factual causal connection expresses the connection of "cause and effect" between the act and the harmful result. The central and accepted test in case law and literature for examining this connection is the "imperfect test," also known as the "test of reason without which there is none." According to this test, conduct will be considered a factual cause of damage only if it can be determined that if it were not for that behavior (act or omission), the damage would not have occurred. If the damage had been caused in any event, even without the tortious conduct, there would be no factual causal connection and the tortfeasor would be exempt from liability (Civil Appeal 1639/01 Kibbutz Maayan Zvi v. Yitzhak Krishov, 58(5) 215, at para. 12 (2004); Civil Appeal 4371/12 CPA Ilan Segev v. Shafir Mivnim Industries (2002) Ltd., at para. 30 [Nevo] (September 17, 2014); Herman, at p. 153).
- In lawsuits against an accountant for negligence or misrepresentation, the application of the non-disclosure test requires proof that had it not been for the misleading representation or professional omission, the damage would have been avoided. This usually requires proof of "reliance", i.e., that the injured party - the client or an expected third party - did indeed review the reports, relied on the accountant's opinion, and that if the situation had been presented in its entirety, he would have acted differently (for example, he refrained from investing). In the absence of proof that the injured party reviewed the reports or would have changed his actions, there will be no factual causal connection ( Mendzicki, paras. 549-551). As stated above, the law and the regulations impose duties on an accountant of independence and to conduct an audit on a reliable scale (see, for example , section 8 of the Accountants Regulations). A breach of these duties may constitute a basis for determining negligence, insofar as it can be proven that this breach caused the actual damage according to the "incomplete test".
Without the recognition of the property, would the covenant have been violated?
- In our case, as stated, the company recognized the advances to the growers as an asset instead of registering them as an expense. As a result, the losses were not recorded in the profit and loss statement, and the liabilities were offset in such a way that the asset was "swallowed" in the contents, and thus the equity presented in the reports was artificially high. This representation allowed the company to appear as if it was complying with the conventions set vis-à-vis the bondholders. It is worth emphasizing that if the payments to the growers had been handled as required, i.e., they had been recorded as an expense in full or at least presented separately as a risky asset whose value was questionable, the real equity would have been much smaller. The plaintiffs showed that if it were not for this method, it appears that Agrexco would have violated the conventions already in the 2007-2008 reports.
- Thus, Prof. Eden confirms in his interrogation that the registration of the advances as an asset on Agrexco's balance sheets was intended to prevent the presentation of losses that would have led to a breach of covenants already at the time of the bond issuance, and thus the issuance itself was possible under the published conditions (Minutes, p. 662, s. 24 to p. 663, s. 21):
"So you confirm to me, and that too it was, I will show you right away that it was also during the investigation, that it was also a consideration in this act, that if not, if you record it as a loss, then also in profit and loss, then in 2007, in 2008 and in 2009, given all the other results and tricks and what you want, they would not have met the Covenant.