And in another place:
"It is difficult to agree with the opinion that accountants are not obligated to carefully examine and examine every detail and every information, and to investigate any real suspicion before confirming that the balance sheet correctly and accurately shows the business situation of the audited entity. Although it is true that in the performance of their duties accountants are entitled to act on the basis of information and explanations that are trusted to them, even if it is later discovered that they were false, but all this on condition that they used proper care and diligence in order to examine and verify their reliability, and if there is any doubt as to the correctness of the statements, or if signs that give rise to suspicion have not been thoroughly investigated, they will not be able to express a positive opinion of the financial statements and the balance sheet without making comments or registering reservations." (Criminal Appeal 709/78 State of Israel v. Anonymous, IsrSC 34(3) 673, 680 (1980), emphases added, Z.Z.).
- Indeed, CPA Milner made two comments in his report: in the introduction to the city, as in every year in which he compiled the company's financial statements, that "no consolidated financial statements were prepared with the subsidiary as required by the statement of the Institute of Certified Public Accountants in Israel", and in the financial report for 1999 (which is the report relevant to our case) he added that "without qualifying our opinion, we would like to draw attention to what was said regarding the investment in the subsidiary for which no provisions were made". It should be noted that as appears from the trial judgment, a similar note appeared in previous years as well, but in the financial report for 1999 there is a comparison in Note 3 between the investment in the subsidiary for which no provisions were made in 1999 and the investment in the subsidiary from 1998.
- However, contrary to the ruling of the trial court, I am of the opinion that sufficing with these comments in the circumstances described amounts to negligence on the part of CPA Milner and does not exempt him from liability. As stated, the comments that appeared in the 1999 report appeared in an almost identical manner in previous reports as well, and therefore, they did not signal to the directors of the deviation that required their special attention to the report before them. Another factor that could have mitigated the "warning flags" was the phrase "without qualifying our opinion," which also contains a reassuring signal to the layman's reader.
- CPA Milner argued, and the trial court accepted this, that the significant increase in the company's investment in the subsidiary occurred in 2000 (when ILS 3,507,337 was transferred and the subsidiary's losses in that year amounted to a similar amount). The data presented by the plaintiffs (which were not concealed) with respect to the annual transfers from the company to the subsidiary and the losses of the subsidiary show that the dramatic change occurred in the transition from 1998 to 1999 as presented above, and despite the additional significant increase that occurred in the transition from 1999 to 2000 in the money transfers, I am of the opinion that there was no reason to ignore the initial change, which required clear consideration and warning when preparing and submitting the financial statements.
- I am of the opinion that CPA Milner was required to express reservations about the 1999 report in a manner that would have drawn the attention of the directors, who do not have expertise in the field, or alternatively to submit consolidated reports of the company with the subsidiary, as required by Statement 57 of the Institute of Certified Public Accountants in Israel.
- As for CPA Milner's claim that no causal connection between his actions and the damage caused to the company has been proven, and that the directors in any case did not review the financial statements and did not hold regular board meetings to discuss these issues, it should be rejected. I will reiterate: It is not impossible that one damage will be caused by the actions of several wrongdoers, without this fact severing the causal connection between the actions or omissions of any of them and the damage caused. It is reasonable to assume that if CPA Milner had submitted the company's financial statements for 1999 jointly with the subsidiary, or included a clear and explicit warning or reservation in the financial statement for that year warning of the significant increase in financial transfers to the subsidiary despite its losses, the financial damage caused to the company could have been avoided or at least reduced. The negligence of the directors cannot serve as a defense to the company's other supervisory bodies and justify negligence on their part.
- The plaintiffs claimed that CPA Milner's liability also stemmed from the fact that he did not add a "going concern" note regarding the company in 1999 and that he did not refer in his financial report to the transactions made in the account after the balance sheet date and until the date of signing the report in April 2001. However, the trial court rejected these arguments. First, it was held that in our case there was no need for a "going concern" note in accordance with Statement 58 of the Institute of Certified Public Accountants, since there was no concern about the continued existence of the company at that time. Second, the trial court insisted that the plaintiffs did not prove that CPA Milner knew or should have known about the actions taken in the company's account after the balance sheet date. These are factual determinations in which I have not been able to intervene, and therefore I propose to dismiss the plaintiffs' appeal directed at them.
- In summary, I would like to propose to determine that CPA Milner was negligent in the manner in which the report was prepared for 1999, and that in view of the significant change in the volume of money transfers from the company to the subsidiary and the subsidiary's losses in that year, CPA Milner should have submitted the company's reports together with the subsidiary's reports. Alternatively, CPA Milner should have included in the report that was submitted clear warnings or explicit reservations in a manner that would have drawn the reasonable director's attention to the unusual investment in the subsidiary and its situation. Had he acted as aforesaid, it is reasonable to assume that this would have provoked any of the supervisory bodies in the company, in a way that could have stopped or at least reduced the flow of funds from the company to the subsidiary, which, as stated above, caused considerable damage to the company.
- The damage caused by the negligence of the late CPA Milner is therefore limited to the period between the date of his signing of the financial statements for the year 1999 (April 25, 2001) and the date of termination of his employment as an applicant accountant of the company (the end of 2001). During this period, according to the data provided by the plaintiffs, which were not concealed, the company transferred the total of ILS 3,971,722 to the subsidiary, and therefore, the liability of CPA Milner, together and severally with the directors, is limited to this amount.
E.4. CPA Shaporan's Appeal and His Liability for the Company's Damages
- The trial court ruled that CPA Shaporan is liable for the company's damages, mainly in view of his role as the auditor of both the company and the subsidiary. By virtue of this, it was determined, Poran was aware of the massive transfers of funds to the subsidiary's account, the transfers of funds from the subsidiary's account to Pinkowitz's private needs, and the subsidiary's poor financial situation. CPA Shaporan appealed the judgment of the trial court, arguing, inter alia, that the elements of the tort of negligence had not been proven in his case, and mainly that the existence of damage to the company had not been proven and that a causal connection between Shaporan's conduct and the alleged damages had not been proven. It was also argued that Shoporan acted in accordance with the accepted accounting rules, and that there was no room to distinguish between him and CPA Milner, as determined in the trial judgment. Shaporan further claimed that the transfer of the funds in the amount of ILS 1.2 million was made on October 6, 2002, on the day that CPA Darman was appointed as the company's operating manager, after the request for a stay of proceedings had already been filed, when the company's problems were already known. Therefore, it was argued, at least in relation to this sum, it cannot be claimed that it was transferred in reliance on the financial statements and without the company being aware of Pinkowitz's actions and its difficult situation.
Large parts of Shaporan's appeal were devoted to the absurd result, according to him, in which it was found that he alone bears the main responsibility for the company's damages, while the members of the board of directors and Shoporan's previous accountant, who served for a longer and more significant period as the company's auditor, were found exempt from liability. It was emphasized that Shaporan's charge even exceeded Pinkowitz's charge at the end of the day, and therefore, it was argued, the result of the judgment was unacceptable.
- I have discussed a large part of Shaporan's arguments above in the framework of the discussion of other issues, and I see no reason to repeat what he said. Thus, for example, the issue of the causal connection that is not severed only due to the existence of additional wrongdoers and the issue of the obligation of the accountant to present reports that faithfully reflect the company's financial situation was discussed. The conclusions presented in the case of CPA Milner are also relevant to the discussion of CPA Shaporan's responsibility, and are even more valid in light of the fact that Shaporan also served as the auditing accountant of the subsidiary in the relevant years of the lawsuit, as noted in the trial judgment.
It should also be noted that Shaporan's main argument that he alone bears the burden of liability for the company's damages, while almost all the other defendants were found exempt, is superfluous in view of the result I reached in this judgment, according to which liability should also be attributed to the directors and CPA Milner.