Auditors: Meet The Parents

In our Law-Now dated 15.03.06 "Auditors and Third Party Liability - Judicial Reassurance" we reported on the first instance decision in Man Nuzfahrzeuge AG and Others v Freightliner Ltd and Others [2005] EWHC 2347 in which a multi million pound claim made by a parent company against Ernst & Young, as auditors of its 100% owned subsidiary, was dismissed.

Last week, the Court of Appeal upheld that decision. However, the case serves as a general warning to auditors of subsidiary companies in relation to their potential exposure in circumstances where they know that the subsidiary could be sold.

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Full Article

In our Law-Now dated 15.03.06 "Auditors and Third Party Liability - Judicial Reassurance" we reported on the first instance decision in Man Nuzfahrzeuge AG and Others v Freightliner Ltd and Others [2005] EWHC 2347 in which a multi million pound claim made by a parent company against Ernst & Young, as auditors of its 100% owned subsidiary, was dismissed.

Last week, the Court of Appeal upheld that decision. However, the case serves as a general warning to auditors of subsidiary companies in relation to their potential exposure when they know that the subsidiary could be sold.

The Facts

The facts of the case are detailed in our previous Law-Now. For the purposes of the issues that remained to be decided when the appeal was heard, it is notable that Ernst & Young were auditors of the truck manufacturer ERF, which was 100% owned by Western Star in Canada. From 1997 onwards, ERF's financial controller had persistently manipulated its accounts In 1999, when completing their audit, Ernst & Young were aware, that Western Star was in negotiations to sell ERF to Man and that the audited accounts would be made available to Man.

The Court Of Appeal Decision

As at the original trial, the decision of the Court of Appeal was driven by specific findings of fact. The principal issue to be decided was whether, given that they were aware of the proposed sale, Ernst & Young owed a "special audit duty" to Western Star when auditing ERF.

The Court of Appeal summarised the trial judge's reasoning for dismissing the claim against Ernst & Young as follows:

No "general audit duty" was owed by Ernst & Young to Western Star in respect of the loss claimed in proceedings i.e. the liability for damages for deceit arising from statements made by the financial controller of ERF in the negotiations for the sale to Man

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