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Lydia Banerjee writes “The professional obligations owed by auditors have been under the spot light in two recent cases”

On 30 January 2019 the Court of Appeal gave their judgment in the case of Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40.  The following day judgment was handed down by the Honourable Mr Justice Bryan in AssetCo Plc v Grant Thornton UK LLP [2019] EWHC 150.

In the Manchester Building Society case advice have been given which was admitted to have been negligent.  A question arose as to whether Grant Thornton were responsible for all the losses flowing from the transactions entered into in reliance on the advice or rather, were they liable only for the losses which would not have been incurred had the advice been correct.

The Court of Appeal summarised the legal approach arising from SAAMCO and in light of the clarification from Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029 as follows:

“(1) It is first necessary to consider whether it is an “advice” case or an “information” case. This is a necessary first step because the scope of the duty, and therefore the measure of liability, is different in the two cases.

(2) It will be an “advice” case if it can be shown that it has been “left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction”, that “his duty is to consider all relevant matters and not only specific matters in the decision” and that he is “responsible for guiding the whole decision making process”.

(3) If it is an “advice” case, then the negligent adviser will have assumed responsibility for the decision to enter the transaction and will be responsible for all the foreseeable financial consequences of entering into the transaction.

(4) If it is not an “advice” case, then it is an “information” case and responsibility will not have been assumed for the decision to enter the transaction.

(5) If it is an “information” case, the negligent adviser/information provider will only be responsible for the foreseeable financial consequences of the advice and/or information being wrong.

(6) This involves a consideration of what losses would have been suffered if the advice and/or information had been correct. It is only losses which would not have been suffered in such circumstances that are recoverable.”

The Court of Appeal found that the case was an information case. Grant Thornton had given advice that Hedge Accounting was an option for the Building Society. This advice was wrong. However, the swaps which the Building Society entered into were entered into partly because of advice over Hedge Accounting and partly for other commercial reasons. Grant Thornton had not been responsible for the whole decision making process. Their liability therefore extended only to the loss which would not have been suffered had the advice been correct.

In reaching their decision the Court of Appeal rejected the assumption of responsibility analysis applied by the Judge below.

In AssetCo, the court considered the extent of the auditors’ duties in circumstances where the affairs of the company were being managed fraudulently. The relevant statutory provisions (ss393(2), 495 and 498(1)) do not require auditors to detect or investigate fraud however, the auditor must apply professional scepticism to accounts in seeking to identify any misstatements, and to report suspected fraud [para 65].

The judge described the admitted failures of Grant Thornton as a “catalogue of failures over two audit years that were of the utmost gravity and that went to the very heart of an auditor’s duties” [para 1115]. Grant Thornton’s errors allowed AssetCo to continue trading in a fundamentally dishonest manner in reliance on the negligent audit [para 962]. After an extensive consideration of the case law on causation [913-966] the judge rejected the argument that the trading losses sustained were outside the scope of an auditor’s duties. He found that had the auditors acted in a non-negligent manner then they would have uncovered the wrongdoing of the management and therefore the business would have taken actions which would not have led to the trading losses claimed. A deduction for contributory fault was however, appropriate.

It is impossible in a note of this nature to do justice to the full judgment in the case nor the multitude of arguments considered in defence.

In both these cases the negligence was admitted and the argument was all about the extent of the losses attributable to the negligence.  They repay close study for anyone defending professional negligence allegations or indeed bringing them.  It is always important to pay attention to the value of a claim and arguments such as those rehearsed in these cases need careful consideration.

Article written by Lydia Banerjee.

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