TAXATION AND FINANCIAL SERVICE LTD HUGHES AND CO (a firm) v. SINO-BRITISH (HK) LTD

HEADNOTE

Auditor's remuneration - whether amount charged is reasonable - court not bound by any formula on a 'time-cost' basis - although directors signed returns for tax purposes prepared by auditors showing auditor's remuneration, company not estopped from raising issue of reasonableness of fee charged.

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JUDGMENT

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1. Mr. F.T. Miller is the managing director of Sino-British (H.K.) Limited, the defendant in this action. In October 1982 Mr. Raymond Hughes established his own firm of professional accountants under the name of Hughes & Company, the second plaintiff in this action. Mr. Miller had known Mr. Hughes since 1980. In January 1982, when he came to know that Mr. Hughes was practising on his own he enquired if Mr. Hughes would be prepared to act as auditors for the defendant as he was dissatisfied with the fees charged by Messrs. Speakman & Co. who were his auditors at that time. The audit fees charged by Speakman for the six months ended the 30th June 1982 were $25,000. Mr. Hughes indicated to Mr. Miller that he would be prepared to act as the defendant's auditors for a lesser sum and that his charges would be on a time-cost basis.

2. In April, 1983 at the request of Mr. Miller, Mr. Hughes acted on behalf of the defendant in work connected with arranging finance from banks.

3. One of the issues in this case is whether the second plaintiff was entitled to charge for the services rendered by Mr. Hughes as sole proprietor in arranging for such finance. It is not unusual for professional accountants to render such services on behalf of clients. The mere fact of employment of a professional agent itself raises a presumption to remunerate him: Miller v. Beal (1879) 27 WR 403. On the evidence before me I see no reason why the second plaintiff was not entitled to charge for such services rendered.

4. There is a conflict of evidence as to when the second plaintiff was appointed auditors for the defendant. Mr. Hughes says it was in July 1983. According to Mr. Miller he contends that it is implicit from his discussion with Mr. Hughes in January that year that Mr. Hughes at that time agreed to act as the company's auditors and was, therefore, the company's auditors since then. Mr. Hughes commenced auditing work in July 1983 when he was told that the accounts of the company were ready for auditing which, presumably, he regarded as confirmation of a decision made to appoint him as auditor for the company.

5. I find on the evidence that in January 1983 when the discussion took place it went no further than an enquiry as to whether Mr. Hughes was willing to act auditor. There is no evidence before me that on receiving an affirmative answer Mr. Miller said anything more. Mr. Hughes was, therefore, entitled to assume that if was to be appointed as auditor he would hear further from the defendant.

6. Whether Mr. Hughes was appointed in January or July, 1983, is not very material to the main issue I have to decide which is whether the fees charged by Mr. Hughes for services rendered in auditing the accounts of the company were reasonable in the absence of any agreement between them as to fees.

7. The fee note was for $19,000 (excluding disbursements) for auditing the accounts of the defendant for the period from the 1st July to 31st December, 1982. When requested for a breakdown  of this sum, Mr. Hughes wrote to the defendant to explain how he arrived at a figure of $18,560 which he rounded upwards to include overtime work. For reason which I need not go into and expressed verbally by me during the trial, I am not satisfied that overtime work was involved or was necessary.

8. The defendant is not a large company. The auditing covered only a period of six months. In the Profit and Loss Account prepared by the second plaintiff for the defendant the auditors remuneration was stated to be $18,000. The defendant then received a bill for $19,000. Mr. Miller was not satisfied. He took the view that the bill was exhorbitant. He declined to pay it. He felt that a sum of $5,883 held to the defendant's credit by the second plaintiff was sufficient to meet the audit fees. Hence, the claim in this action by the second plaintiff for the balance due after deducting payments made on account by the defendant.

9. In deciding what is reasonable remuneration for services rendered by a person acting in a professional capacity regard can properly be had to the level of fees normally charged by his colleagues in the business for that type of work and the time involved in the performance of it with due consideration being taken of all other relevant factors in determining whether the fees charged were reasonable. It would be idle to set any standard to measure 'reasonableness'. I decline to be bound by any formula devised for assessing 'time-cost' as it is a factor that may vary from time to time and with firm to firm although the way in which time-cost has been computed may be looked at in deciding the issue of reasonableness. I do not accept that a larger firm is entitled to charge a higher fee than a smaller firm for the same work done simply because it has higher overhead expenses. Nor do I accept the suggestion that in the absence of any agreement between the parties if an audit is done by a more senior partner, the firm is thereby justified for that reason to charge a higher fee. If a firm is engaged to audit accounts, the firm name is merely a convenient symbol or shorthand form for collectively designating all the partners and the client can rightfully expect that he will not be billed for a higher fee simply because the work was performed by a more senior partner.

10. I do not propose to dwell on the volume of work entailed in auditing the accounts of the defendant. The evidence in this regard is not disputed. The books and records of the defendant were not in good condition. From the working papers produced there is every reason to believe that considerable time was spent in the task of ravelling and checking the accounts of the company. It is not denied that the work in auditing the accounts involved 76 hours by the senior audit clerk, 20 hours by Mr. Hughes' qualified assistant and 2 hours by Mr. Hughes in checking and conducting the final review. I have had sight of the working papers which appear to me to be not inconsistant with the time spent in auditing the accounts.

11. At the hearing, Mr. Hughes was constrained to admit that on a time-cost basis, he could justify a charge of $17,840 which included the services he rendered to the defendant in obtaining finance from banks. I do not feel it necessary to go into the computation of how the figure was arrived at save to say that it includes 12 hours of 'travelling' time by his audit clerk which was charged at the rate of $60 an hour (totalling $720) on which calculation the balance payable by the defendant on the claim by the second plaintiff would be $10,707.30.

12. The travelling time and charge rates are disputed by Mr. Miller. He admits that his office was situated in the Western district but he comments that the time spent in travel could hardly be justified unless the clerk elected to walk. It is a point well taken. Even if the clerk went on foot I do not know the distance he had to cover. He may have lived close to the defendant's office and journeyed directly there. The clerk was not called to give evidence. Mr. Miller was not given the opportunity of cross-examining him and there is no evidence before me on what time was spent on travelling. Mr. Hughes' evidence in this respect is hearsay. I do not find this item proved.

13. Apart from this, the difficulty that confronts Mr. Miller is that the second plaintiff has adduced evidence from a professional accountant attached to a well known firm to the effect that from a perusal of the working papers and the time spent by the staff of the second plaintiff in dealing with the matter the charge imposed is reasonable. Mr. Miller has not called or was unable to call any evidence in rebuttal. Mr. Miller's case is that he has managed to obtain the services of a firm of public accountants to audit his accounts for the ensuing year for a sum of $12,000. This fee is for auditing the accounts for an entire year so he contends that the fees charged by the second plaintiff which cover a period of only six months are grossly excessive. In fairness to Mr. Miller he recognises the problem he has in pursuading me to accept the validity of this aspect of his argument since what another accountant may charge for some work to be done in the future has no bearing in deciding whether the work performed by the second plaintiff was or was not reasonable. It may well be that the books, records and account of the defendant are now kept in good shape for which reason his current auditors are prepared to charge a lesser fee.

14. Although no pre-arranged fee was agreed between the parties, I would regard section 131(8) of the Companies Ordinance as an indication of the desirability that professional accountants should come to some arrangement for the fixing of an estimated fee or fee range when undertaking an audit for an incorporated body. The Tenth Schedule of the Companies Ordinance requires the amount of the auditors remuneration to be shown in the profit and loss account under a separate heading. One of the objectives of the requirement appears to be aimed at ensuring that the company's true financial state of health is not coloured by stating a remuneration less than that which may ultimately be charged. As the defendant's accounts were prepared by the second plaintiff showing the audit fee to be $18,000 it is questionable whether the second plaintiff is entitled to claim a sum exceeding that amount unless some manifest error can be shown. However, the defendant is not precluded, by reason of its directors having signed the accounts showing the auditors remuneration to be $18,000 from averring that the amount charged is excessive or unreasonable since section 131(8) of the Companies Ordinance allows the court to fix the remuneration if no pre-arranged fee had been agreed upon. Indeed, it often happens, as in this case, that the Balance Sheet with the Profit and Loss Account had to be signed urgently for submission to the Commissioner of Inland Revenue to avoid penalties. As a taxpayer is left with little or no choice in such circumstances, I do not think the principles of estoppel would apply to deny him the right to contest the fee charged if he can show it to be unreasonable.

15. As stated by me above, the second plaintiff during the hearing of this action felt he could justify a fee of $17,840 which include the travelling charges and the work done in arranging finance from banks. Except for the travelling charges in the sum of $720 which has not been proved, I find the second plaintiff's claim for fees to be reasonable. Deducting a sum of $720 from the amount stated, I give judgment for the second plaintiff in the sum of $9987.30 (representing the balance payable by the defendant) and costs of this action.