A major accounting firm has been sued for almost $5.5 million after the Federal Court ruled it attempted to conceal an error that is costing a business client $660,000 annually.
The Federal Court ordered that Neville’s Bus Service (NBS), trading as Busabout, was entitled to $5,485,416 from its one-time accounting firm Pitcher Partners Consulting as “damages for deceit”.
The full sum to be paid by the accounting firm, including costs, will be determined at a later hearing after 21 January 2019.
NBS, owned and operated by the Calabro family who have a seven-decade history of operating bus companies in Australia, launched the legal action following a dispute relating to a tender with the NSW Government over the provision of bus services.
The company, which employs more than 200 people and operates around 180 buses in the state, alleged its accounting firm had been fraudulent, negligent, breached its client contract and also broke Australian Consumer Law.
Amortisation error a costly mistake
In 2012, NBS lodged a tender with Transport for NSW (TfNSW), the state government’s public transport authority, to provide public transport services within certain areas of Sydney. Pitcher Partners Consulting, a division of Pitcher Partners, was involved in the drafting of the tender documents, with the tender ultimately successful.
According to the court, such contracts cover “the full amount of the finance costs that an operator will incur for those buses to be used in any given region that are up to 15 years old”, and so the cost is to be included within the tender document as a capital cost.
The mistake arose with the amount of the “Vehicle Termination Payment” being included instead of the original purchase price of the buses not being included, which would have been significantly higher.
This error then meant the amortisation over the 15-year term of the contract was inaccurate, resulting in the company taking an annual hit of $660,000.
“Because the error was contained in the tender documents, the tender which TfNSW accepted significantly understated the available funding from the government,” the court ruled.
“As a consequence, the costs incurred by NBS in performance of the … contract were, and remain, significantly higher than the costs incorporated in the tender bid and upon which the … contract price was agreed.”
The court went on to describe the error as “startingly simple, yet critical”.
Deceptive conduct once the mistake was discovered
While both parties agreed the error had been made, the case revolved around the subsequent conduct of the firm, and in particular Ian Stewart, who at the time was an executive director at Pitcher Partners Consulting and a partner of Pitcher Partners.
Specifically, the conduct in question was whether Mr Stewart had acted dishonestly by concealing the error from his client, and whether NBS was able to prove that the error and any dishonesty had directly caused financial losses.
NBS asserted that Mr Stewart knew of the error by early 2014, but failed to notify the company as his client, and furthermore had actively attempted to conceal it, by creating new documentation in August 2014 with the correct figures and claiming these had been used in the original tender.
The bus company also alleged the accounting firm had charged it for services not rendered, specifically a QA review that would have discovered the original amortisation error.
Pitcher Partners Consulting admitted leading up to the trial that it had made the error and its conduct had breached the tender and modelling agreements it had with NBS, had been negligent and had breached consumer law.
It also accepted that NBS would have been better off to the tune of $660,000 for each year of the contract had it been notified of the error in a timely fashion that enabled it to renegotiate the amount with Transport for NSW.
However, the accounting firm, and Mr Stewart, denied the allegations of fraud or dishonesty. Moreover, it countered that as NBS was still making a profit from the tender, and as such, that it has not suffered a recoverable loss.
Accountant had ‘consciousness of guilt’
After a 13-day trial, including cross-examination of Mr Stewart that lasted three days, the court handed down its verdict just days before Christmas.
It ruled that Mr Stewart had been aware of the error prior to its admission to NBS, and had made a deliberate effort to conceal the error from his client, branding him as “evasive” while giving testimony during the trial.
“Mr Stewart, in August 2014, on his own (admittedly reluctant) admission, dishonestly misled Mr Joe Calabro into thinking that a spreadsheet entitled ‘Tender Analysis – Option D’, which was attached to an email communication and which did not contain the amortisation error, were the figures that had been submitted in the tender bid – when in fact, as Mr Stewart well knew, the document had been prepared a day or two earlier as part of his colleagues’ endeavours to determine the reason for the ‘shortfall’,” the court said in handing down its almost 40,000-word verdict.
“That demonstrates a “consciousness of guilt” and is another reason to conclude that Mr Stewart knew about the error and misled Mr Calabro about the provenance.”
The court also called Mr Stewart’s evidence “incredible” when he said during cross-examination that the tender agreement had “been varied to absolve him of the need to carry out a QA review, something he had earlier agreed was the firm’s practice and which should have been done”.
It also noted the firm’s attempts to “deflect blame” onto the client by stating that a buffer had been applied to projected costs, that the QA review had been declined by NBS and that NBS had insisted on aggressively pricing the tender, claims the court found to be “simply untrue”.
The assertion of NBS as still making a profit which therefore meant it had not suffered losses was also struck down as “irrelevant”.
But the court did not agree with NBS’ claim that it was owed fiduciary duties by Mr Stewart and Pitcher Partners Consulting.
In handing down its determination, the court ruled that the accounting firm was itself not dishonest, but that it was liable “for Mr Stewart’s deceit”.
Pitcher Partners and Busabout have both been contacted for comment.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.