October 2012

The early consideration of issues in accountants’ negligence actions can help to identify the major points of contention and keep professional costs under control.

Some types of negligence by accountants are matters of fact – in many tax cases, for example, deadlines may have been missed. Other types of negligence may involve reports made to shareholders and/or other parties in which the accountants expressed an opinion which was not justified by the financial state of affairs of the business concerned.  An example of this type of negligence is a “clean” audit report in a situation in which the auditors, had they carried out their work more carefully, should have qualified their report to draw attention to deficiencies in the company’s financial statements. In other circumstances, accountants preparing the accounts of a business may have departed from generally accepted accounting practice, leading to the misstatement of its performance and financial position.

Whatever the cause of the negligence, the accountants’ client (or former client) may feel that the next step should be to sue.  Negligence actions against accountants can, however, be expensive.  They typically involve a detailed examination by expert accountants of the defendant accountants’ working papers.  The experts may also need to review a great deal of source documentation, particularly in audit negligence cases. The claimant must prove that the accountants did not exercise the skill and care of reasonably competent accountants, and must also prove that the accountants’ negligence caused loss to the claimant.  If the negligence did not have any significant financial consequences, there will be no point in bringing an action.

For the above reasons, and to ensure cost-effectiveness, it is important to involve expert accountants from the outset.  In particular, the following issues can be raised in relation to the accountancy evidence at an early stage without protracted disclosure and other litigation procedures:

  • the extent, if any, to which there are inconsistencies between different documents generated by the accountants, for example between their audit or accounting working papers and correspondence with the client;
  • the extent to which the accountants reviewed specific third party documents, especially where such documentation is inconsistent with work done or with the conclusions reached by the accountants;
  • the existence of actual or possible inconsistencies between the approach taken by the accountants to specific issues and the provisions of relevant legislation, accounting or auditing standards or other guidance;
  • the existence of evidence which would indicate whether the planning, recording or supervision of the accountants’ work was adequate such as notes of meetings and telephone discussions; and
  • the extent to which the accountants were involved in the preparation of the accounts of the business in question.

It is important for both claimants and defendants and their legal teams to address these issues.  Claimants and their advisers could consider discussing the elements of the claim with expert accountants so that focused and relevant questions which address these issues can be drafted with the intention of ensuring that defendant accountants consider them carefully.  Similarly, defendants and their advisers could consider discussing relevant issues with expert accountants to help determine the strengths and weaknesses of claimants’ cases.  For both claimants and defendants, issues can be identified by carrying out a preliminary review of the financial statements of the business concerned, as these may contain a great deal of useful information.

The early consideration of issues such as those described above may help to achieve a settlement as the factual issues which often form the core of the case will have been examined and clarified at the outset.  The result may be significant cost savings for both parties.

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