Liability of auditors for negligent audit – how times change!
Back in 2009, on the last day that the House of Lords delivered judgments, it was decided on a 3:2 majority that Moore Stephens were not liable for the negligent audit of Stone & Rolls Ltd. Moore Stephens failed to spot that the sole director had defrauded the company. The Court said that the Company was presumed to know of the actions of its director under the principle ex turpi causa.
Fast toward to Jetivia SA v Bilta (UK) Limited in 2015 and the Supreme Court said that the wrongdoing or knowledge of the directors could not be attributed to the Company. The Court said Stone & Rolls should be put to one side and marked “not to be looked at again”.
Now in Assetco v Grant Thornton the High Court has gone further by stating for the first time that auditors can be liable for the Company’s trading losses caused by a negligent audit. The extent of the liability will very much depend on the facts of the case, and it is inevitable that the Company will be liable for contributory fault which will reduce the size of any award. The Court also said that the auditors were not liable to compensate the Company for dividends because the decision of the directors to declare & pay dividends was an intervening act.
Whilst the Company was being run in a fundamentally dishonest way, the Court rejected the auditors’ arguments that the failures in the audit were caused by the Company’s false representations as to availability of information.
Presumably, these decisions will be appealed because it is new law and the sums involved are substantial.
Before Liquidators get too excited about the possibility of suing auditors, it has to be remembered that all these cases concern dishonest activity within the Company where auditors have specific responsibilities. The basic principle (called the SAAMCO principle ) is that auditors (as with other professional advisers) will only be liable if they assumed responsibility for the decision making that led to the losses. In Manchester Building Society v Grant Thornton the Court of Appeal has confirmed that "A person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong." As a result the auditors were not liable on the facts of the case.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.