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Accountants and auditors professional indemnity update

19 December 2016

The importance of testing witness evidence - Barclays Trust Company (Jersey) Ltd & others v Ernest & Young LLP (2016)

The claimants sought £18m in damages for alleged professional negligence of their accountants in providing ‘top up’ due diligence services in relation to their acquisition of Esporta, a health & fitness business.

The claimants case at the start of the trial was that, but for the alleged negligence of their accountants, they would have sought to renegotiate the purchase price, failing which they would have withdrawn from the purchase. However, in cross examination the claimants’ main witness said, “I would not have done that, my lord, to go and ask for a price reduction when you have put a deposit. I would look like an idiot… I would have just lost my deposit and walked away… There is no way I would have asked him for a price reduction after I’d already committed the Trust and put a deposit”. By the end of the trial, the claimants had abandoned the suggestion that they would have sought to renegotiate the purchase price, basing their case as to causation entirely on the contention that they would have withdrawn from the transaction.

The Commercial Court found that the accountants did not act in breach of duty. The judge went on to consider causation in case his conclusions on breach were subject to appeal. It was held that, even if the accountants had acted in breach of duty, no loss was caused to the claimants as the alleged failures made no difference to the claimants’ decision to proceed with the transaction.

Although the concession in cross examination was not fatal in this case, it serves as a reminder of the need to test the evidence of witnesses as soon as possible and in any event before trial.

Who’s responsible for an inaccurate tax return? Blackman v HMRC (2016)

The First-Tier Tribunal Tax Chamber (FTT) has rejected a professional footballer’s appeal against an inaccuracy penalty, finding that the footballer had a duty to check his tax return, which had been prepared by his accountants, for any obvious errors before submitting it.

During the 2012/13 tax year the footballer was employed by three different clubs but the return only declared income from two clubs. The footballer paid the additional tax due, but challenged the penalty levied by HMRC on the basis that, he was a footballer not a “financial wizard” and “as a footballer he wouldn’t have had the training to establish whether the tax return was correct or even be able to understand the tax return, a complicated document".

The FTT considered Schedule 24 of the Finance Act 2007 which removes liability of a taxpayer to a pay a penalty where a return is completed and lodged by an agent; and the inaccuracy in the return is the result of something done or omitted by the agent; and the taxpayer took ‘reasonable care to avoid that inaccuracy’.

FTT gave the footballer the benefit of the doubt that the inaccuracy was the result of something omitted by the accountants, but they decided that the footballer had not taken reasonable care to avoid the inaccuracy as the error appeared several times throughout the return (stating 2 employers instead of 3) which is not only intelligible to tax professionals.

Accountants and their insurers will no doubt welcome this decision, but it is worth noting that if the footballer did provide all the required information to his accountants and they negligently prepared the return, he may well be successful in making a professional negligence claim against them.

Disclaimers - Barclays Bank PLC v Grant Thornton UK LLP (2015)

The High Court has granted summary judgment in favour of a firm of auditors, dismissing a claim made by a bank for damages in connection with audit services provided to Von Essen Hotels Limited Group (VEH), on the basis that there was a clear disclaimer on the front page of the audited accounts.

VEH engaged a firm of auditors to audit its non-statutory financials for the purpose of providing such information to a bank to verify financial covenant compliance. The audited reports were addressed to VEH and the front page of the reports contained a disclaimer that the firm of auditors would not accept or assume responsibility to anyone, other than VEH, in relation to the reports or its audit work.

It was later discovered that the audited accounts were prepared on the basis of fraudulent representations by some of VEH’s employees. The bank sought to argue that the firm of auditors owed them a duty of care as, (i) the bank had relied on the reports, (ii) the auditors would have known that the bank was relying on the reports and not obtaining their own advice in respect of the accounts, and (iii) the disclaimer did not apply to the bank as it was not brought to their attention.

The commercial court held that the disclaimer included within the report was sufficient to preclude the firm of auditors owing a duty of care to the bank. This is the first time 'Bannerman' (Royal Bank of Scotland v Bannerman (2003)) type clauses have been tested in the English courts and this decision will give comfort to auditors going forwards that they can rely upon such disclaimers.

Scope of duty - Mehjoo v Harben Barker (2014)

In June 2013, the claimant was awarded £1.4m in damages against his accountants. The accountants were found negligent for failing to advise the claimant that he may have non-dom status which carried with it significant tax advantages and that he should therefore obtain advice from a firm who specialised in advising non-doms on their tax affairs.

The accountants appealed the judge’s findings on liability and causation. When considering breach of duty the Court of Appeal considered the accountants retainer letter in detail and found that the letter did not impose any obligation on the accountants to advise the claimant as to how he might minimise his tax liabilities, unless they were specifically requested to do so. The court went onto consider whether providing general advice as to how any relevant tax liability could be reduced would infer an implied duty of care.

The Court of Appeal overturned the decision of the High Court finding that a duty to give specialist tax planning advice could not be inferred from a course of conduct relating solely to general routine tax advice provided by the accountants.

The Court of Appeal’s decision highlights the importance of accountants having retainer letters clearly setting out the scope of their duty. This decision will be reassuring to accountants and their insurers, as the court found that the scope of an accountant’s retainer will be limited to the terms of their retainer letter and whilst implied terms can exist, the duty is unlikely to extend to giving advice outside the accountants general expertise.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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