Auditor's Negligence - Giving 'information Only' Advice As A Professional

• Published date: 14 December 2020
• Subject Matter: Accounting and Audit, Litigation, Mediation & Arbitration, Audit, Trials & Appeals & Compensation, Professional Negligence
• Law Firm: Hill Dickinson
• Author: Mr Joseph Cooper

In the recent case of Assetco plc -v- Grant Thornton LLP [2020] EWCA Civ 1151, the Court of Appeal clarified the extent of losses for which an auditor was liable for a negligent failure to identify in its audit that a business was insolvent. The case addressed issues relating to the SAAMCO cap on losses where a professional has provided 'information only' advice in respect of a transaction.

Background facts

Assetco plc (Assetco) was the holding company of a group of business that provided various services related to fire and rescue. Its 2009 accounts (Accounts) audited by Grant Thornton, painted a picture of a healthy, expanding and profitable group of businesses, however, this was not the case. In fact, Assetco's chief financial officer and chief executive officer had acted dishonestly in the preparation the Accounts. This was common ground between the parties, and the Court of Appeal recognised that the individuals in question had 'duped Grant Thornton into giving an unqualified audit report by lying and forging documents'.

It was two years until the true state of affairs was realised. New management assessed the prospects of the group and entered a scheme of arrangement with its creditors and the group avoided insolvent liquidation.

Assetco claimed against Grant Thornton in negligence, seeking losses principally in respect of sums it had paid to Assetco's loss-making subsidiaries. Assetco's position was that Grant Thornton's negligent failure to spot the true position had deprived it of the chance to restructure in 2009. Had it known the true position, it would have been able to enter a scheme in 2009 and avoid the losses it suffered.

First instance

At first instance, the High Court found in favour of Assetco and ordered Grant Thornton to pay damages of circa '22.36 million (with a 25% reduction for contributory negligence).

Grant Thornton appealed on the basis that:

1. The trial judge had erred in his conclusion that the losses claimed by Assetco fell within the scope of its duty of care, and that the breaches of duty it admitted were the legal or effective cause of those losses
2. In finding for the Assetco, the trial judge was wrong to conclude that in the counterfactual scenario where Grant Thornton were not negligent, it was a certainty that Assetco would successfully have entered into and completed a scheme and restructuring in 2009 (thereby avoiding the losses it suffered)

In its judgment, The Court of Appeal clarified points in respect of both...