Frankston & Hastings Corporation v Cohen [1960] HCA 6; (1960) 102 CLR 607 (23 February 1960)

HIGH COURT OF AUSTRALIA

FRANKSTON & HASTINGS CORPORATION v. COHEN [1960] HCA 6; (1960) 102 CLR 607

Local Government (Vict.)

High Court of Australia
Dixon C.J.(1), McTiernan(2), Fullagar(3), Menzies(4) and Windeyer(5) JJ.

CATCHWORDS

Local Government (Vict.) - Auditor - Relationship with municipality - Conduct of auditor - Duty to exercise care - Liability for breach of duty - Local Government Act 1946 (Vict.), Pt. XVI.

HEARING

Melbourne, 1959, October 14, 15, 16; 1960, February 23. 23:2:1960
APPEAL from the Supreme Court of Victoria.

DECISION

1960, February 23.
The following written judgments were delivered:-
DIXON C.J. In my opinion this appeal should be allowed. I have had the

McTIERNAN J. In my opinion the reasons and judgment of Smith J. are right. I do not think it is necessary to add anything to them and consequently I think that the appeal should be dismissed. (at p611)

FULLAGAR J. This case comes from the Supreme Court of Victoria, and is an appeal by leave against an order made by Smith J. in chambers. (at p611)

2. The Shire of Frankston and Hastings brought an action against the Commercial Bank of Australia Ltd. and two individual defendants, named respectively Lamb and Cohen. So far as the Bank and Lamb are concerned, a settlement was reached before Smith J. made his order, and that order affects only the present respondent Cohen. The statement of claim alleges against Cohen that, having been appointed under the Local Government Act 1946 as auditor of the accounts of the plaintiff municipality, he so negligently conducted the audit that an officer of the council of the municipality, a man named Stanes, was enabled to misappropriate large sums of money over a period. Voluminous particulars of the alleged negligent conduct of the audit were delivered with the statement of claim, and the amount claimed by way of damages against Cohen is 10,956 pounds 10s. 5d. Before a defence was delivered Cohen issued a summons asking (inter alia) that those paragraphs of the statement of claim which applied to him should be struck out on the ground that they disclosed no reasonable cause of action. In the normal course of things this summons must have been dismissed, because it was clear that the statement of claim disclosed at least an arguable case, and it is well settled that an order of the kind sought, which would have the practical effect of disposing summarily of an action, should not be made unless it is quite clear that the plaintiff cannot succeed: see Dey v. Victorian Railways Commissioners [1949] HCA 1; (1949) 78 CLR 62 per Dixon J. (1949) 78 CLR, at pp 90-92 . However, the plaintiff joined with the defendant Cohen in asking Smith J. to determine finally the question raised by the summons on the pleading. That question, to use his Honour's words, is whether the bare facts that the defendant Cohen is a municipal auditor with a certificate of competency, that he has been duly appointed by the Governor in Council under the Act to be auditor for a municipality, and that he, in consequence, conducts an audit of its accounts, are sufficient to place him under a duty to the municipality to use care and skill in auditing the accounts. (at p612)

3. Smith J. answered this question in the negative. His Honour thought that an auditor appointed by the Governor in Council under the Act was required to exercise quasi-judicial powers. Having that capacity, he owed no duty of care to anyone, and could be made liable for something done in that capacity only if it were done mala fide. His Honour also thought that such an auditor was appointed not for purposes of the municipality but exclusively for purposes of the Crown, which was interested in seeing that municipal councils acted at all times lawfully and properly in the administration of the "public trust" on which their funds were held. That being the purpose of the auditor's appointment, he owed no duty of care to the municipality. (at p612)

4. I would make one observation at the outset. There is, as his Honour pointed out, no allegation in the statement of claim of any contract or agreement between the defendant Cohen and the plaintiff, or of any representation made by him to the plaintiff. The question depends on the interpretation of the Act, and on implications (if any) arising from the appointment of the defendant under the Act and his acceptance of that appointment. At the same time I do not think that the plaintiff's pleading would preclude it from maintaining that the duty, which it alleges at large, is, in the last analysis, contractual in nature. (at p612)

5. As will be seen, I agree up to a point with much of what his Honour has said, but, with respect, after full consideration of a case which is not without difficulty, I do not think that his analysis of the position is exhaustive. It presents, I think, a part of the picture, not the whole of it. (at p612)

6. It is tedious, but, I think, necessary, to set out the substance of the provisions of the Local Government Act 1946 which deal with the accounts of municipalities and the auditing of those accounts. The following summary is taken from the judgment of Smith J. "Section 461 imposes a duty upon the council of every municipality to cause books to be provided and kept in such form (if any) as may from time to time be appointed by the Governor in Council, and to cause true and regular accounts to be entered therein of all moneys received and paid on account of the municipality, and of the purposes for which they have been received and paid. Section 465 (1) requires the council to keep the books and accounts of the municipality entered up and ready for inspection at all times during the year. The council is also required to cause the accounts to be balanced to 30th September in each year, and an annual statement to be prepared showing the financial position of the municipality at that date: ss. 467 and 472 (1). This statement must contain such information and be in such form as the Governor in Council from time to time by order appoints: s. 472 (2). Sections 462 and 463 confer upon all councillors, ratepayers, and creditors, of the municipality the right to inspect, copy and take extracts from, the books of account so kept. But in addition there are four distinct methods of audit or inspection which may be put into operation by the Governor in Council under the Act. There are 'ordinary audit', 'continuous audit', 'special audit', and 'inspection'. It is with 'ordinary audit' that we are here directly concerned but some reference needs to be made also to the provisions regarding the other three methods. Section 488 deals with the appointment of an auditor to carry out an ordinary audit. It provides that the Governor in Council 'may appoint for each municipality' some person 'to be auditor and may remove any person so appointed'. To be eligible for appointment a person must hold a certificate, from the Municipal Auditors Board, of competency 'to exercise the office of municipal auditor'. The section further provides that 'the auditor' so appointed 'for any municipality' shall be paid out of the municipal fund thereof such remuneration as the Governor in Council may fix. The annual accounts balanced by the council to 30th September must be produced and laid before the auditor with all vouchers in support of the same and all books papers and writings in the council's custody or power relating thereto: s. 469. He is required to audit the accounts as soon as conveniently may be, and also to audit the annual statement showing the financial position of the municipality: ss. 468, 472 (2). Any person interested in the accounts, either as a creditor of the municipality or as a ratepayer, may be present at the audit of the accounts and may make any objection in writing to any part of them: s. 471. For the purposes of the audit the auditor may hear evidence upon oath, and may by summons under his hand require persons to appear personally before him and to produce such books and papers as he thinks necessary for the audit: and he may himself deal with a neglect to comply with his summons, or a refusal to answer questions, in the same way as the like conduct can be dealt with in cases in which justices have summary jurisdiction: s. 490. In certain cases he may demand the production of books papers and cash belonging to other local governing bodies or to waterworks trusts; and every bank at which the municipality has an account must furnish him with full particulars: ss. 491 (3) and 492 (2). If the accounts are found correct he is required to sign them in token of his 'allowance' of them; but if he thinks there is just cause to disapprove of any part of them he may 'disallow' that part: s. 470. Within six weeks of the completion of the audit a meeting of the council must be held upon fourteen days' public notice; and at such meeting or some adjournment of it the accounts, as balanced by the council, and audited and either allowed or disallowed by the auditor, and the annual statement, shall be produced: ss. 476 and 477. All creditors, ratepayers and other persons interested are entitled to be present: s. 477 (2). The accounts shall be then finally examined and settled by the council; and if they are found just and true they shall be allowed by the council and certified accordingly under the hand of the chairman of the meeting. They are then 'final in regard to all persons whomsoever', unless there is subsequently a special audit: ss. 478 and 479. An abstract of the accounts so certified showing whether the auditor has allowed them or not is to be prepared by the council each year and copies kept at the office of the council and made available for inspection by any creditor or ratepayer. Continuous audits are provided for by s. 481. It is there enacted that in addition to the ordinary audit the Governor in Council may direct that, in the case of any municipality, an audit of its accounts be made from day to day or at such intervals as the Governor in Council determines. The provisions of s. 488 relating to the qualification, appointment, removal and remuneration of auditors appointed to make ordinary audits are made applicable, with any necessary modifications, to auditors appointed to make continuous audits: s. 481. Special audits are provided for in ss. 493-500. A special auditor may be appointed for any municipality by the Governor in Council upon the request in writing of not less than twenty ratepayers and upon the giving of security for the costs and expenses, or without any such request or security. The Governor in Council fixes the period of the audit. The council of the municipality is required to have its accounts balanced to a day appointed by the Governor in Council and a full and true statement drawn up and laid before the special auditor. He is required to report to the Minister the result of the special audit and to certify any misapplication of funds that has occurred either wilfully or through culpable negligence. Before so certifying he must appoint a time and place for hearing such explanations as may be offered. Provision is made for the recovery of moneys certified to have been misapplied. The costs and expenses of the special audit are to be paid, as the Governor in Council may order, out of moneys appropriated by Parliament, or out of the security provided, or out of the municipal fund. Section 489 provides for the appointment by the Governor in Council of two persons to be inspectors of municipal accounts, and for their removal by the Governor in Council. To be eligible for appointment a person must hold a certificate, from the Municipal Auditors Board, of competency to exercise the office of inspector of municipal accounts. Inspectors are to be paid salaries and allowances fixed by the Governor in Council, and these are payable out of moneys appropriated by Parliament for the purpose. The provisions of s. 490 relating to the hearing of evidence on oath, the summoning of persons to appear and to produce documents, and the imposing of punishment for a refusal to answer or a neglect to comply with a summons, are all expressed to apply not only to ordinary audits but also to continuous audits, special audits and inspections. The same is true of the provisions of s. 491(3) relating to the production of books papers and cash belonging to other local governing bodies or to waterworks trusts. In the case of continuous audits and of inspections there are special powers to require the production of documents and cash by the council and officers of the municipality, and the furnishing of information by such officers: ss. 491(1) and 492(1). There is also a special obligation imposed upon an inspector, and upon an auditor appointed to conduct a continuous audit, to report to the Minister if he finds that the books and accounts have been allowed to remain in arrear for more than one month: s. 465(2)." (at p615)

7. It is necessary, I think, to make only a brief reference to the history of the relevant statutory provisions, which was examined in some detail by Mr. Newton during the argument of the appeal. The consolidating Act of 1890 contained provisions for the appointment of municipal auditors which differed from those now in force. Part IV of that Act was headed "Officers of the Municipality", and Div. 3 of Pt. IV was headed "Auditors". Division 3 consisted of ss. 159-164. Section 159 provided that auditors should be elected annually for every municipality, and ss. 160 and 161 provided that the election of auditors should be held at the same time and conducted in the same manner as the annual election of councillors. Section 163 provided that in addition to the elected auditors the Governor in Council might from time to time appoint an auditor for every municipality and might remove every auditor so appointed. Part XIII of the Act dealt with "Accounts and Audit". The provisions of this Part were less elaborate than those contained in the Act of 1946, but I can find no significant difference. The Local Government Act 1891 repealed s. 163 of the Act of 1890, and by s. 42 provided that the Governor in Council might appoint as auditor for each municipality a person holding a certificate of competency from the board to be constituted under s. 40. Curiously enough, s. 159 of the Act of 1890 does not seem to have been specifically repealed, but it was omitted from the consolidating Local Government Act 1903, as were also the other sections in Div. 3 of Pt. IV of the Act of 1890. (at p616)

8. So long as the office of an "ordinary" auditor was elective, I should think it clear, in spite of the heading of Pt. IV of the Act of 1890, that he was not (any more than is an elected councillor) an officer or servant of the municipality. The fact that he is (as he now is) appointed by the Governor in Council is not inconsistent with his being such an officer or servant, and the fact that he is paid out of the municipal fund might perhaps be used to support an argument that he is. But I think it clear, as Smith J. thought, that he is not such an officer or servant. The whole purpose of the statutory provisions relating to audit is to have a qualified person unconnected with the council who shall exercise an independent examination and supervision of the municipal accounts. It cannot be maintained here that any duty to the plaintiff arose from any relation of master and servant or of employer and employee. It should be noted also, I think, at this point that there would seem to be no relation of master and servant between the auditor and the Crown. If the plaintiff in this case had sued the Crown and not the auditor, one answer to the claim would have been that which was made in such cases as Enever v. The King (1906) 3 CLR 969 . (at p616)

9. It seems to me that the correct starting point in this case is found by asking what are the functions of an auditor appointed by the Governor in Council "for" a municipality. (I use for the time being the neutral term "functions", avoiding the technical term "duty"). I do not think that his functions are matter for doubt. Sections 490-492 confer a number of powers on an auditor appointed including a power to hear evidence on oath and even in certain cases to impose sanctions. These powers may be regarded as quasi judicial, and it may very well be that in the exercise of them he can incur no liability except for something done mala fide. But these powers are given to him merely as a means to an end, and it is not in ss. 490-492 that we must look in order to find out his functions - the real purpose of his appointment. His primary function seems to me to be stated in clear and simple terms in s. 468. Section 467 requires the accounts of the municipality to be balanced to 30th September in each year. Then s. 468 says that after each such balancing "the auditor shall audit the said accounts", and, in order that he may do this, s. 469 requires the council by its clerk to lay before the auditor the accounts with "all vouchers . . . and all books papers and writings in its custody or power relating thereto". (at p617)

10. Questions will often arise as to whether an auditor in a particular case ought or ought not to do this or that particular thing, and such questions are questions of fact. But the word "audit" is a well known English word, and the general nature of what constitutes an audit seems plain enough. The Oxford English Dictionary defines the noun "audit" as "an official examination of accounts with verification by reference to witnesses and vouchers". Mr. R.A. Irish in his book "Practical Auditing" (p. 1) says: "An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the Auditor to verify the Balance Sheet. The main objects of any audit are: (a) To certify to the correctness of the financial position as shown in the Balance Sheet, and the accompanying revenue statements. (b) The detection of errors. (c) The detection of fraud. The detection of fraud is generally regarded as being of primary importance". (at p617)

11. What the auditor is required to do is to "audit the accounts", and he is to be supplied with all the material necessary to enable him to make an audit in the ordinary meaning of that expression. I can see no reason for saying that he is not concerned with the interests of the municipality but only with some interest of the Crown - that he fully performs his function if he seeks to investigate only such matters as whether there has been some ultra vires borrowing or some misapplication of funds by the council. Smith J. refers to what was said by Farwell L.J. in R. v. Roberts (1908) 1 KB 407, at p 437 . What Farwell L.J. said was: "I think that the term 'auditor' is unfortunate; it leads the mind to the idea of a company's auditor, whose business is to ascertain and state the true financial position of the company at the time of the audit and nothing more: see Lord Lindley's judgment in In re London and General Bank (No. 2) (1895) 2 Ch 673 ". I do not know what term the learned Lord Justice would have used instead of the term "auditor". But, apart from that, the words "and nothing more" suggest that the functions of a municipal auditor are not less extensive, but more extensive, than those of a company's auditor. And this is borne out by reference to what was said by Lindley L.J. in the case cited (1895) 2 Ch, at pp 682, 683 . Farwell L.J. a little later in R. v. Roberts (1908) 1 KB 407 said: "Down to this point the powers of the auditor largely exceed those of any other . . . auditor" (1908) 1 KB, at p 438 . He adds that "the auditor has functions of a judicial nature to perform" (1908) 1 KB, at p 438 . But no limiting effect can be given to these words. On the one hand, the statement that the powers of a municipal auditor "largely exceed" those of any other auditor appear to me not to deny that he has the functions of any other auditor but to assume that he has those functions. And, on the other hand, to say that he has powers of a judicial nature (given to him, as I have observed, as a means to an end) is not to define exhaustively his functions, or indeed really to define them at all. It is not possible, in my opinion, to read any of the special powers and directions given to the auditor by the Local Government Act as qualifying, or in any way derogating from, the express fundamental requirement that he shall "audit the accounts". The plaintiff complains here not of any negligent exercise of a quasi-judicial power but of the negligent doing of professional work. (at p618)

12. Another consequence follows, in my opinion, if we accept, as I think we must accept, the view that the primary and essential function of the auditor is to audit. For it is impossible then to say that the investigation of the auditor is not a matter of internal interest to the municipality itself, but is required and undertaken solely in order that the Crown may be assured that the Local Government Act is being obeyed by the council as such. I would not deny that the Government of the State has an interest (though it is not a direct pecuniary interest) in seeing that local governing bodies do not engage in such enterprises as ultra vires borrowing, and I would conced that one of the purposes of the audit is to bring to light any misfeasance or nonfeasance of the council as such. But I cannot think that this is its sole purpose. A municipality stands just as much in danger of being robbed by fraudulent employees as any other employer, and a regular audit is one generally accepted means for preventing and discovering frauds by employees. When the Act says that the auditor shall audit the accounts, I feel no doubt that it is just as much concerned with protecting the municipality and the council from fraud as with ensuring that the council itself keeps within the law. (at p618)

13. Then, if this be so, it seems to me that the auditor must be subject to a duty to exercise reasonable care in carrying out his audit of the accounts, and that that duty is owed to the municipality. It is not his appointment by the Governor in Council as such that is the important thing here. The important thing is his acceptance of the appointment, and his entering upon the task of auditing the accounts. That task requires special qualifications, and, in entering upon it, in the words of Willes J. in Harmer v. Cornelius [1858] EngR 939; (1858) 5 CB (NS) 236 (141 ER 94) , "Spondes peritiam artis: Thus, if an apothecary, a watchmaker, or an attorney be employed for reward, they each impliedly undertake to possess and exercise reasonable skill in their several arts. The public profession of an art is a representation and undertaking to all the world that the professor possesses the requisite ability and skill. An express promise or express representation in the particular case is not necessary" (1858) 5 CB (NS), at p 246 (141 ER, at p 98) . In my opinion a duty of care exists, and it is a duty owed to the municipality. It is "for" the municipality that he is appointed, it is for the benefit and protection of the municipality (albeit there may be other purposes) that he enters on his task, and it is out of the funds of the municipality that he is paid. The duty arises out of the relationship between auditor and municipality which is created by the acceptance of the appointment and the entering upon the task. I should not have thought it open to doubt that a company's auditor owed to the company, apart from the specific duties imposed upon him by the Companies Act, a general duty to exercise reasonable care and skill. And I should not have thought that his general duty would be different if the Act, instead of requiring that every company should appoint an auditor, required that the Attorney-General should appoint an auditor for every company from a panel to be drawn up. (at p619)

14. I agree with Smith J. that the case is not covered by direct authority, but it is desirable to refer to one or two of the cases cited by his Honour. The case of Thomas v. Devonport Corporation (1900) 1 QB 16 is, I think, important. In that case an auditor sued for further remuneration under s. 246 of the Public Health Act 1875. The terms of the relevant provisions of that Act were not dissimilar to those of the Local Government Act 1946 (Vict.) and what s. 246 itself required was that the accounts of the authority "shall be audited and examined by the auditors". Phillimore J. appears to have taken a very limited view of the duties of auditors. The Court of Appeal, affirming Phillimore J., held that the auditor was not entitled to remuneration beyond an amount which had been paid into Court, but Lord Russell of Killowen C.J., speaking for himself, A.L. Smith L.J. and Vaughan Williams L.J. said: "I do not subscribe to the doctrine that his sole duty is to see whether there are vouchers, apparently formal and regular, justifying each of the items in respect of which the authority seeks to get credit upon the accounts put before the auditors for audit. I think that is an incomplete and imperfect view of the duties of the auditors. I think an auditor is not only entitled, but justified and bound to go further than that, and by fair and reasonable examination of the vouchers to see that there are not amongst the payments so made payments which are not authorized by the duty of the authority, or contrary to the duty of the authority, or in any other way illegal or improper. If he discovers that any such improper or illegal payments appear to have been made, his duty will certainly be to make it public by report to the authority itself" (1900) 1 QB, at p 21 . This passage has the force of a dictum only, but it seems to me definitely to support the view which I take of this case. In Attorney-General v. De Winton (1906) 2 Ch 106 , Farwell J. referred to this passage, and said that, even if auditors under s. 27 of the Municipal Corporations Act 1882 ought to do what Lord Russell had said that auditors under s. 246 of the Public Health Act ought to do, and report any illegal payments to the council, the "duty" was a duty of imperfect obligation (1906) 2 Ch, at p 119 . I think that what Farwell J. had in mind was no more than the possible or probable ineffectiveness of a municipal audit in the absence of an express power to "surcharge", but it may be inferred from the passage, read as whole, that he thought that a statutory direction to "audit accounts" without more did not impose on an auditor the duty which Lord Russell said that it did impose. In so far as the passage suggests that, I respectfully disagree with it. (at p620)

15. Tumbarumba Shire Council v. S. (1916) 3 LGR (NSW) 162 was a case in which a municipality sued an auditor for negligence in failing to discover defalcations. Ferguson J. directed the jury that the defendant owed a duty to the plaintiff to use due care and skill (1916) 3 LGR (NSW), at p 164 . As Smith J. has pointed out, the Local Government Act 1906 (N.S.W.) differed from the Local Government Act 1946 (Vict.). Section 184 of the former Act provided that the books and accounts of a council "shall be audited" by auditors to be appointed by the council. It may be an arguable question whether the appointment of the auditor under that Act made the auditor a servant of the corporation. But, in my opinion, it did not, and, unless it did, it can, in my opinion, make no difference whether the auditor was appointed by the council itself or by some outside authority such as the Governor in Council. I do not think that the Tumbarumba Case (1916) 3 LGR (NSW) 162 can be distinguished from the present case. It may be noted in passing that the Local Government Act now in force in New South Wales provides expressly (s. 211) that the auditor is to use "due care skill and diligence", and the section states in some detail the matters on which he is to report to the council and the Minister. The duty is thus made an express statutory duty. In the Tumbarumba Case (1916) 3 LGR (NSW) 162 Ferguson J. appears to have regarded the duty, in the absence of any such express provision, as a duty arising out of implied contract and not as a statutory duty in the true sense of that term. (at p621)

16. Finally, there is an interesting New Zealand case to which his Honour referred. This is the case of New Plymouth Borough v. The King (1951) NZLR 49 . This also was a case of an action by a municipality for damages for the alleged negligent conduct of an audit. The Public Revenues Act 1926 made the Audit Office (i.e. the Crown) responsible for the auditing of municipal accounts. The learned Solicitor-General, Evans K.C. said: "It is conceded, but for the purposes of this particular case only, that, under the Public Revenues Act 1926, the matter may be treated as one of quasi-contract, the Audit Office having the obligations of an ordinary auditor, subject to the limits imposed by the statute" (1951) NZLR, at p 54 . And Stanton J. said: "I had myself thought that there might be some doubt as to whether a breach of statutory duty by the Audit Office would give rise to a right of action by the council, seeing that the Public Revenues Act 1926, was - as I should think - a statute passed primarily for the benefit of the public at large, and not for the advantage or protection of local authorities. However, the Solicitor-General invited me to deal with the matter on the basis that such a right did exist, and agreed with Mr. Cooke's submission that this statute came within the general rule stated by Lord Simonds in the House of Lords in Cutler v. Wandsworth Stadium Ltd. (1949) 1 All ER 544 as follows: 'if a statutory duty is prescribed, but no remedy by way of penalty or otherwise for its breach is imposed, it can be assumed that a right of civil action accrues to the person who is damnified by the breach'" (1951) NZLR, at p 63 . These observations of the learned judge seem to treat the assumed duty as arising by implication from the statute. I would rather regard the duty as arising from a relationship created pursuant to the statute. But what the Solicitor-General is reported as having said makes it clear that, as Smith J. has said, the point now at issue was conceded (not, one imagines, without due consideration) and not decided in the New Zealand case. It may be noted that the relevant statute, by s. 125, provided that: "The Audit Office shall be the auditor of all local authorities, and shall have the same duties and powers in respect of the moneys and accounts of every local authority, and of every person dealing therewith, as it has in respect of the public moneys and accounts and of all persons dealing therewith". The costs and expenses of the audit were payable by the local authority (s. 130). (at p622)

17. For the reasons which I have given, I am of opinion that this appeal should be allowed. (at p622)

MENZIES J. The one issue raised by this appeal is whether or not an auditor appointed by the Governor in Council pursuant to the Local Government Act 1946 (Vict.) as auditor for a municipality, owes the municipality any duty of care so that it can recover from him damages for loss which it has suffered by reason of his lack of skill and care in the audit of its accounts. Smith J., in an action for damages for negligence by the appellant municipality against the respondent who was its auditor for the years 1954 and 1955, has, in interlocutory proceedings, determined this issue against the municipality and it is from that decision that the appeal to this Court has been brought by leave. (at p622)

2. Part XVI of the Local Government Act 1946 requires the council of a municipality to keep true, regular and up-to-date accounts of all sums of money received and paid on behalf of the municipality and to balance its accounts on 30th September each year. Thereafter, the auditor for the municipality appointed by the Governor in Council from among those holding certificates of competency granted by the Municipal Auditors Board shall, as s. 468 provides, "audit the said accounts", and, for this purpose, it is the duty of the municipal clerk to produce to the auditor "the accounts so balanced as aforesaid with all vouchers in support of the same, and all books papers and writings in its custody or power relating thereto" (s. 469). Then s. 470 provides that: "If the accounts are found correct, the auditor shall sign the same in token of his allowance thereof; but if he thinks there is just cause to disapprove of any part of the said accounts he may disallow any part of the said accounts so disapproved of". In addition to the balanced accounts, an annual statement showing the financial position of the municipality to the end of September must be prepared (s. 472). Any person interested in the accounts may be present at the audit and may make objections. The audited accounts are available for inspection. It is the duty of the council to examine the audited accounts at a meeting where all persons interested in the accounts may be present. The council settles the accounts and "if the same are found just and true they shall be allowed by the council" (s. 478). It is provided by s. 479 that: "After such accounts have been so allowed and signed by such chairman (except as hereinafter provided with regard to a special audit) they shall be final in regard to all persons whomsoever". It is also the duty of the council to have an abstract of its certified accounts prepared which must contain a statement showing whether the auditor has allowed the accounts or not. This must be kept open for inspection and published in a local newspaper (s. 480). Remuneration is provided for by s. 488(2): "The auditor for any municipality shall be paid out of the municipal fund thereof such remuneration as the Governor in Council may fix and may recover the same from the municipality in any court of competent jurisdiction". (at p623)

3. The history of Pt. XVI was traced for us by Mr. Newton. The origin of the provisions therein contained seems to have been the Municipal Corporations Act of 1835 (5 & 6 Will. IV, c. 76) and provisions based upon that Act came into the local government legislation of Victoria in 1863 (27 Vic. No. 176) which followed like provisions made for road districts by an Act of 1853 (16 Vic. No. 40). It is not necessary to set out this history in detail but two things have a present significance. The first is that originally, auditors were elected from among those capable of election as members of district boards or municipal councils, as the case may be, by those qualified to vote for board members or councillors. The election of auditors remained until 1891 when it was replaced by the present system of appointment by the Governor in Council. An intermediate step had been taken in 1874 when provision was made for an auditor appointed by the Governor in Council to act with elected auditors. The second is that the Act of 1863 conferred upon district boards the right to appeal to a court of general sessions against any disallowance of any part of its accounts by the auditors. This provision disappeared in 1869 at the same time as provision was made for special auditors to give the certificates to be mentioned hereafter. (at p623)

4. The provisions of Pt. XVI which I have summarized relate to what I may describe as an annual audit of the accounts of the municipality. Part XVI, however, provides for other means of investigating the accounts of municipalities and it is necessary to refer to these shortly. In addition to the annual audit, provision is made for the Governor in Council to direct a continuous audit of the accounts of a municipality or, in specified circumstances, a special audit. Provision was first made for continuous audit in 1934 but there is no express provision relating to the duties of a continuous auditor. Those are left to inference. Provision for special audit was made as far back as 1863 and from the beginning it has been the duty of special auditors to report to the Government, now a Minister but formerly the Governor. In 1869, as previously mentioned, it became the duty of a special auditor to certify whether there had been any misapplication of the moneys of the municipality either wilfully or through culpable negligence and if so, whether any councillors were privy thereto. As the Act stood in 1946, upon confirmation of such a certificate by the Governor in Council, it becomes conclusive evidence of the fact of the misapplication of moneys, of the amount misapplied and the liability of the councillors named. Such sums may be recovered from any councillors named at the suit of a law officer or a ratepayer and whatever is recovered goes into a fund depleted by the misapplication. All this is provided for by ss. 497 and 498. The costs of special audit are payable as the Governor in Council may order out of (a) moneys appropriated by Parliament, (b) money deposited as security upon request for a special audit, or (c) municipal fund (s. 500). (at p624)

5. In addition to providing for audit, Pt. XVI provides for the payment of two inspectors of municipal accounts to whom any municipality is bound at any time to produce its accounts for inspection. Although there is no express provision it is to be inferred from the Act that inspectors, who are paid out of moneys appropriated by Parliament for the purpose, report to the Governor in Council and not to the municipality whose accounts are inspected. (at p624)

6. To complete this review of the provisions of Pt. XVI, it is necessary to add that auditors and inspectors are given the very wide powers of inquisition set down in ss. 490-492. (at p624)

7. This review of Pt. XVI warrants the following conclusions:-
(1) Auditors, whether elected or appointed by the Governor in Council, are auditors of or for the municipality and the method by which a person becomes an auditor for a municipality is not really significant, in determining his relationship to the municipality. No distinction can be drawn between an elected auditor and an appointed auditor apart from the mode of removal. It is, for instance, not to be thought that between 1874 and 1891 when there were elected auditors and an appointed auditor the duties of the appointed auditor were different from those of the elected auditors.
(2) The relationship between a municipality and its auditors is not and never has been contractual. Whatever duties an auditor owes to the municipality depend upon the character of the office and not upon any bargain between the municipality and the auditor. (3) The auditor for a municipality is a watch dog upon the council and its officers for the benefit of the municipality as an authority of the State and of those who deal with it whether as ratepayers or otherwise.
(4) The fact that the old system of the election as auditors of persons without special qualifications was replaced by a system whereby auditors with special qualifications are appointed by the Governor in Council betokened Parliament's acceptance of the position that if a person is to perform the task of auditing the accounts of a municipality he must be both disinterested and expert.
(5) The expert knowledge required of an auditor is the ability to determine whether the accounts of a municipality are complete, true and correct. (at p625)

8. Although the acceptance of these conclusions does not necessarily require the further conclusion that an auditor is under a duty to the municipality to conduct the audit honestly and with reasonable skill and care, it does seem to me to justify such a conclusion. The facts that the Governor in Council appoints a qualified person to be an auditor for the municipality, that the results of the audit have to be communicated to the municipality and that it is the municipality that is bound to pay the auditor his remuneration, seem to me to point to the establishment of a relationship which has as an element the duty of the auditor to the municipality to do his work properly. It is most unlikely that an auditor is under no duty to do his work honestly and with skill and care and it seems to me that his relationship with the municipality is so much closer than to the Governor in Council or to the Minister, that it is a proper inference that his duty is to the municipality. (at p625)

9. In support of an opposite conclusion three contentions were urged, all of which are to be found in the powerful judgment of Smith J. The first is that an auditor is appointed by the Governor in Council and is not engaged by the municipality. I have already indicated why I do not attach weight to this consideration and I merely add by way of analogy that an auditor of a public company appointed at an annual general meeting (Companies Act 1958 (Vict.) s. 141(1)) would seem to be in exactly the same position as an auditor appointed by the Governor in Council (s. 141(2)). (at p625)

10. The second contention which I regard as one of considerable weight is that Pt. XVI is concerned with the investigation of the accounts of authorities of the State by public officers performing statutory duties. This seems clearly to be so in the case of inspectors of municipal accounts. It may well be so in the case of special auditors whose duty it is to report to the Minister. It may naturally be said therefore that annual auditors are to be regarded as in the same position. I have reached a conclusion, however, that there is a clear distinction to be drawn between annual auditors and both inspectors of municipal accounts and special auditors, if it be the case that the only duty of the latter is to the Minister or Governor in Council. (at p626)

11. The Act creates no relationship between the inspector of municipal accounts and the municipalities whose accounts are investigated. An inspector is clearly enough a public official exercising supervision on behalf of the central government over municipal governments. The special auditor seems to me, however, to be in an intermediate position. Section 497 requires such an auditor to report to the Minister and any certificate of misapplication of funds has to be confirmed or disallowed by the Governor in Council. There is no provision for direct communication between a special auditor and the municipality and it may be that the only duty of the special auditor is to the Governor in Council or the Minister. On the other hand, however, there are elaborate provisions to which I have referred which show clearly that in the case of the annual auditor, the municipality has to be made aware of whether the auditor finds its accounts correct or disapproves of them and if so, the grounds of his disapproval, and there is no express requirement that such an auditor should report either to the Governor in Council or to the Minister. As I read Pt. XVI all provisions relating to the annual audit could operate without any such report, but it does appear from s. 480(2) that it is expected that if such an auditor disallows any part of the accounts, the Minister will be made aware of this and the reasons therefor so that he may, if he wishes, exercise his power to direct that the reasons for disallowance should not be published. If it be that the provisions of the Act relating to special audits indicate that the whole duty of a special auditor is to the Governor in Council or the Minister, a like process of reasoning based upon the obligations which the Act imposes upon an annual auditor would, it seems to me, lead to the conclusion that the duty of such an auditor is to the municipality and not to the Governor in Council or the Minister. The continuous auditor would appear to me to be in the same situation as the annual auditor. (at p626)

12. The third contention against the conclusion I have expressed is that the auditor's function in allowing or disallowing the accounts is quasi-judicial so that no action can be maintained for mere failure to use care and skill in the performance of functions of that character: Partridge v. General Council of Medical Education and Registration of the United Kingdom (1890) 25 QBD 90 , Everett v. Griffiths (1921) 1 AC 631 . In support of this, reliance was placed upon four matters. The first is the matter of history already referred to that there was once an appeal from the auditor's decisions to a court of general sessions. The second depends upon the provisions which authorize the attendance of interested persons at the audit, which give them the power to object and then which provide that when the accounts have been allowed, examined and settled, they shall be final in regard to all persons whomsoever except when there is a subsequent special audit (s. 479). The third matter is the wide power of inquisition given by s. 490 to the annual auditor in common with other auditors and inspectors of accounts. The fourth matter is that when a certificate of a special auditor has been confirmed by the Governor in Council, the Act gives that certificate the quality of conclusive evidence in courts of law and it is said the duties of an annual auditor are of the same character as those of a special auditor. These matters taken together are of considerable weight but I am not satisfied that the duty of an annual auditor goes beyond the audit of accounts and their allowance or disallowance. The function of a municipal auditor making an annual audit seems to me to approximate to that of a company auditor making an annual audit. Taking each of the foregoing matters in turn, I would observe that the position which existed prior to 1891 is not now a safe guide because the amendments of 1891 made it clear that the audit is to be the examination of accounts by a person of special skill. The fact that there was originally an appeal to general sessions at a time when the provisions as to special auditors were not as they are now, seems to me to throw little light upon the function of annual auditors at the present time. As to the second and third matters, it is true that the Act does confer upon annual auditors powers and duties beyond those of the ordinary company auditor but this is explicable on the ground that the auditor is appointed to investigate the books and accounts of a governmental authority. So far as s. 479 is concerned, I should say that I have no confidence that I understand what is meant by the provision that the accounts when allowed and signed "shall be final in regard to all persons whomsoever", but the important thing for present purposes is that what gives the accounts that degree of finality is not the certificate of the auditor but their allowance by the council after its examination of their correctness. As to the fourth matter, for reasons which I have already given, I do not think it possible to draw any inference as to the function of an annual auditor from the function of a special auditor. Furthermore, it is the confirmation by the Governor in Council of a special auditor's certificate that gives it the character of conclusive evidence. (at p627)

13. In the course of his judgment, Smith J. considered a number of authorities but all I think it necessary to say is that because I do not attach weight to the fact that an auditor is appointed by the Governor in Council and not by the municipality itself, I find some support for the view that I have taken in Tumbarumba Shire Council v. S. (1916) 3 LGR (NSW) 162 although the claim there seems to have been based on contract rather than tort. I agree, however, with Smith J. that no decided case governs the decision of this case. (at p628)

14. In the course of the argument which was addressed to us, reference was made to the number of cases where a duty of care has been inferred from a particular relationship. It does not seem to me to be necessary to examine these cases because of my conclusion, based upon the provisions of Pt. XVI, that the relationship of municipality and auditor for the municipality imports a duty owed by the auditor to the municipality. (at p628)

15. I think the appeal should be allowed. (at p628)

WINDEYER J. I have had the advantage of reading the judgments of my brothers Fullagar and Menzies. I need say no more than that I agree that this appeal should be allowed. The respondent, having entered upon the duties of auditor for the municipality, had, I consider, a duty to the municipality to conduct the audit with due skill and care. (at p628)

ORDER

Appeal allowed with costs.

Order of Smith J. discharged. In lieu thereof order that the summons be dismissed with costs.