WK Construction (Pty) Ltd v Moores Rowland and Others

WK Construction employed Mr Maartens as its financial director. Between 2006 and 2013, Mr Maartens defrauded WK Construction of R80,132,548 by including fraudulent transactions in its books of account. The fraud involved moving expenses from an active directors' account (67997) to a closed project account (69990) without proper journal entries. The respondents (collectively referred to as Mazars) were WK Construction's auditors from 2007 to 2015 and issued clean audit reports each year, failing to detect the fraud. WK Construction recovered R26 million from Mr Maartens but sustained a net loss of R54,132,548. In February 2013, Ms De Coster (the financial manager) discovered suspicious transactions. By 9 August 2013, detailed investigations revealed the full extent of the fraud to the Kusel directors. By 22 August 2013, WK Construction had taken steps including changing locks on Mr Maartens' office, revoking his banking access, and instructing attorneys to investigate property transfers to him. WK Construction instituted action against Mazars on 23 August 2016 for breach of the auditing contract. Mazars raised a special plea of prescription.

• When does prescription commence to run in claims for professional negligence by auditors under section 12(3) of the Prescription Act 68 of 1969?
• What constitutes 'knowledge of the facts from which the debt arises' in the context of auditor negligence?
• Is knowledge that the primary wrongdoer (the fraudster) cannot repay the debt a prerequisite for prescription to commence running against the auditor?
• Is expert evidence of auditing standards and breach thereof required before a creditor can be deemed to have the requisite knowledge for prescription to commence?
• What is the appropriate test for determining whether a creditor has sufficient knowledge in professional negligence cases?

The appeal was dismissed with costs. The special plea of prescription raised by Mazars was upheld, extinguishing WK Construction's claim.

In claims for professional negligence against auditors, prescription commences to run under section 12(3) of the Prescription Act 68 of 1969 when the creditor has knowledge, actual or constructive, of facts that would cause it on reasonable grounds to suspect possible negligence and to seek further advice. Such knowledge does not require: (a) expert evidence regarding professional standards or breach thereof; (b) knowledge that the primary wrongdoer is unable to repay the debt; (c) knowledge of legal conclusions or the ability to prove negligence; or (d) every piece of evidence necessary to prove each fact at trial. Knowledge of the 'facts from which the debt arises' means knowledge of the material operative facts constituting the cause of action—namely, facts showing the auditor conducted audits, fraud occurred and was reflected in audited accounts, and the auditor issued clean reports without detecting the fraud. Where these facts would lead a reasonable person to suspect possible auditor negligence, prescription commences, even if the creditor lacks proof of specific breaches of auditing standards.

The court declined to adopt the test recently articulated by the Supreme Court of Canada in Grant Thornton LLP v New Brunswick 2021 SCC 31, which requires 'knowledge of material facts upon which a plausible inference of liability can be drawn'. The court noted this test was developed against the backdrop of Canadian law requiring 'prima facie grounds' and found it unnecessary to depart from the established South African test in Truter and Links. The court also noted that since it upheld the special plea of prescription, it was unnecessary to consider the alternative defence based on a contractual time bar clause. The court observed that the function of auditors includes maintaining independence, exercising critical inquiry with a reasonably high degree of skill and diligence, and acting in good faith. The court emphasized that the special plea context differs from a trial on the merits—at trial, evidence of auditing standards and expert opinion would 'almost invariably be necessary', but such evidence is not required to determine when prescription commenced running.

This case clarifies the application of section 12(3) of the Prescription Act in professional negligence claims against auditors. It establishes that: (1) prescription begins to run when a creditor has knowledge of facts that would cause reasonable suspicion of possible negligence, not when the creditor can prove negligence; (2) expert evidence of professional standards and breach is not required for prescription to commence; (3) knowledge that a primary wrongdoer cannot repay is not a prerequisite for prescription to run against a professional advisor; (4) the creditor need only have 'minimum facts necessary to institute action', not facts to prove the case 'comfortably'; (5) knowledge of legal conclusions is not required. The judgment reinforces the policy that prescription should not be indefinitely postponed while creditors gather evidence to prove their cases. It provides important guidance on the intersection of fraud, auditor negligence, and prescription, balancing the need to protect defendants from stale claims against creditors' rights to pursue legitimate claims.