Moreover, in examples of errors that are substantial due to qualitative considerations, the Guidelines document explicitly cites the following example:
"2) An error that affected the corporation's compliance with financial standards or other contractual requirements" (ibid., at p. 9).
- In light of the above, and even without addressing the quantitative thresholds (which the experts themselves did not adequately address), I accept CPA Aviv's argument in his opinion and the plaintiffs' argument in general that the alleged deficiencies are material from an accounting perspective, since the breach of the covenant is undoubtedly material in the accounting sense.
Was a negative or qualified opinion necessarily required in our case?
- The auditing accountant can give several types of opinions on financial statements: unqualified, qualified, negative, or avoiding opinions. A negative opinion will be given when the financial statement does not accurately reflect the state of the company's business or the results of its operations, or when the defects are so numerous or so material that the financial statement as a whole is incorrect. On the other hand, a qualified opinion will be given when there is a material reason that prevents the granting of an unqualified opinion, but its effect is not so material as to require a negative opinion or refraining from an opinion (sections 12-17 of the Accountants Regulations; the Broida case, para. 9; Tzipora Cohen, p. 183).
- However, even when there is a material legal dispute or uncertainty regarding the need to make provision in the financial statements, if the company operates in accordance with accepted accounting rules and relies on professional opinions, such as legal opinions, the report may be considered appropriate and will not require a negative opinion. In such cases, the emphasis is on the existence of a reasonable professional basis for the accounting decisions, even if in retrospect it turns out that the result is different (Class Action (Tel Aviv-Jaffa District) 41280-03-21 Shlomo Golovinsky v. C. El Group Ltd., paras. 37, 61 and 64 [Nevo] (October 9, 2024)).
- As to the type of opinion that should have been given in the circumstances of the case, and after I have determined that the accounting handling of the special payments to growers did not meet the requirements of the accounting standard, I am of the opinion that the defects that were found justify the granting of a qualified opinion, but do not amount to the presentation of a negative opinion. On the one hand, it has not been proven before me that these are such sweeping and substantial deficiencies that the financial statements as a whole have ceased to faithfully reflect the company's situation; On the other hand, it should not be ignored that this is a material issue, relating to a significant item in the balance sheet, which would have prevented the provision of an unqualified opinion.
- However, it is appropriate to distinguish between an accounting error and audit negligence. The mere determination that a certain registration does not conform to the standard does not automatically lead to the conclusion that the auditing accountant was negligent (Sayig, 22; Mibel Investments, para. 319). The examination of the comptroller's liability is done in accordance with the standard of conduct of a reasonable accountant, while giving weight to the scope of professional judgment given to him (Civil Case 1026/96 Saa Gal Car Rental Company in a Tax Appeal v. S.H.M. Car Rental Company Ltd., para. 10 [Nevo] (December 11, 2007); the Dardor case, para. 13; the Mendzitzky case, p. 532). In our case, as I will explain in detail below, it was proven that the relevant accounting and business policy was consistent and long-lasting, implemented over an extended period of time, approved by the company's organs, and was not accompanied by an open and significant professional dispute in real time. Added to this is the fact that the Government Companies Authority also did not have reservations about the company's reports. As I will explain in detail below, although the "regulatory approval" is not in itself an instrument for accounting misconduct, it serves as a relevant indication for assessing the reasonableness of professional judgment and the scope of the duty of care. In these circumstances, it cannot be ruled out that the defendant's decision not to make reservations on the relevant dates falls within the scope of legitimate professional judgment, even if in retrospect it was found that there was room to take a different accounting position.
- Moreover, I do not agree with the plaintiffs' argument that the failure to grant a reservation enabled the company to continue to operate and raise debt while presenting a false situation and led to the deepening of the damage. Accordingly, I cannot accept the plaintiffs' arguments regarding the impact of the accountants' conduct on the economic decisions of creditors and investors, according to which this information would have changed the picture of the company's situation and the manner in which the decisions of the users of the reports were made, and therefore its non-disclosure reveals a material defect in the defendant's conduct to the point of negligence. The mere existence of a breach of a covenant or a cash flow difficulty does not necessarily necessitate an immediate cessation of activity, especially in this specific case, in which all the parties involved were aware of the situation, and there was no causal connection between the manner in which the reports were presented and the company's economic collapse (or the company's failure to collapse as claimed by the plaintiffs in their summaries) and the damage caused to the company accordingly, which stemmed mainly from poor business management and not from the accounting audit. In addition, a variety of indications indicate that the creditors' reliance and the damage caused to them in this regard did not stem from the financial statements, but mainly from the assumption, which in retrospect turned out to be erroneous, according to which the state's share in the company attests to its economic strength and solvency. I will explain these assertions.
Would the company have ceased operations sooner?
- The defendant argues that there is no causal connection between the accountants' failures and the date of the cessation of activity, since the collapse stemmed from external factors (especially the state), and structural factors (in the form of thin capital) and the closing losses would have occurred in any case where the shelter had been "closed", regardless of the date of the accounting disclosure. On the other hand, the plaintiffs claim that the accounting failure did not cause the collapse, but rather prevented its disclosure at an earlier date in 2008. In other words, according to the plaintiffs, the approval of the accounting policy served as "crutches" for a "dying" company, and the artificially extended life of the company enabled the "spilling of funds" and the accumulation of additional huge losses at the expense of the creditors, damage that would have been avoided if only the accountants had reservations about the reports in real time.
- In the context of the plaintiffs' claim that there is a causal connection, there is room to place on the table, in all its clarity, the test of logic and common sense. In its decision on the appeal, the Supreme Court noted the theoretical possibility that:
"It is possible that the 'losses' accumulated by the company during the years in which it continued to operate, were the product of improper business conduct or of funds illegally taken from it; and secondly, that if Kost had acted properly, it is possible that the parties in the company would have known of the existence of the resulting losses in real time, and would have acted to prevent them or at least reduce them in the future.(Decision of the appeal, at para. 70).