Navigating Professional Negligence Claims against Accountants & Auditors

Professional Negligence Claims against Accountants & Auditors

Negligence claims against accountants and other tax professionals have increased significantly over the past few years. The importance of cash flow and ensuring that business accounting records are accurate cannot be understated particularly given the current economic climate. Therefore, when professionals such as accountants and auditors, fall short of their duties, the consequences can be severe.

Our lawyers have extensive experience in obtaining successful outcomes for clients who have suffered negligence or financial loss from accountant malpractice. In this article we explore professional negligence claims against accountants. Our lawyers look into what constitutes professional negligence, the necessary elements to prove a claim, common examples, and relevant case law in negligence claims against tax professionals.

What is Professional Negligence?

Professional negligence occurs when a professional such as an accountant or auditor, fails to perform their duties to the required standard of care, resulting in financial loss or damage to their client. This standard is typically defined by the level of skill and diligence one can reasonably expect from a competent professional in the same field.

Key Elements to Prove Negligence against a Tax Professional

To establish a successful claim against an accountant or auditor for professional negligence, the following elements must be proven:

  1. Duty of Care: The accountant owed a duty of care to the claimant. This is usually quite easy to prove if there is a contractual agreement or advice given to the claimant
  2. Breach of Duty: The accountant breached that duty through actions or omissions
  3. Causation: The breach directly caused a loss to the claimant
  4. Quantifiable Loss: The claimant suffered a measurable financial loss as a result.

Common Examples of Accountant Negligence

In our lawyers’ experience in dealing with such claims successfully, there are several common examples of negligence claims against tax professionals such as:

  • Errors in Tax Filings: Incorrect tax calculations or missed deadlines leading to penalties
  • Mismanagement of Financial Statements: Inaccuracies in financial reporting impacting decision-making
  • Inadequate Advice: Providing unsound financial or investment advice
  • Negligent Auditing: Overlooking significant discrepancies or fraud in financial documents.

If you have suffered professional negligence by an account, our lawyers will help recover compensation for you. Please call us on 0207 459 4037 for a Free Consultation today.

Reported Case Law Examples of Accountant Negligence

There are several cases in England and Wales which highlight the ramifications of accountant negligence:

Galoo Ltd v Bright Grahame Murray (1994) 1 WLR 1360 (auditor negligence)

Galoo Ltd, a company involved in the garment industry, appointed Bright Grahame Murray (BGM), an accounting firm, to provide professional accounting services. BGM was engaged to audit Galoo Ltd’s financial statements. Their role was critical for ensuring the accuracy and reliability of financial information, which Galoo Ltd relied upon for its business operations and decisions.

Galoo Ltd alleged that BGM had been negligent in the conduct of their audit. Specifically, it was claimed that BGM failed to detect and report significant financial difficulties faced by one of Galoo Ltd’s main customers, which later went into liquidation. As a result of BGM’s alleged negligence, Galoo Ltd argued that they continued to supply goods to this customer, ultimately leading to substantial financial losses when the customer was unable to pay.

Outcome: The Court of Appeal overturned the High Court’s decision at first instance. It was held that BGM did owe a duty of care to Galoo Ltd and that their failure to detect the customer’s financial difficulties constituted a breach of this duty.

The Court of Appeal’s decision highlighted that accountants have a responsibility to detect and report significant risks that could impact their client’s financial decisions.

Mehjoo v Harben Barker [2014] EWCA Civ 358 (accountant negligence)

Hossein Mehjoo, a successful businessman, brought a claim against his accountants, Harben Barker, alleging professional negligence. The case revolved around tax liability advice, specifically in relation to capital gains tax (CGT) that Mehjoo incurred after selling shares in a company.

Mehjoo, of Iranian descent, had been a client of Harben Barker for a considerable period. He had built up significant trust in their services over the years.

In 2005, Mehjoo sold his shares in a fashion business, resulting in a substantial CGT liability.

Mehjoo sought advice from Harben Barker on mitigating this tax liability. However, Harben Barker failed to advise him about a specific tax scheme known as the Bearer Warrant Scheme (BWS), which could have been advantageous for Mehjoo due to his non-domiciled status in the UK.

The primary legal question was whether Harben Barker owed a duty to advise Mehjoo about the BWS as part of their tax planning services.

Outcome: The Court of Appeal held that Harben Barker did not owe Mehjoo a duty to advise on the BWS. The court found that although Harben Barker was aware of Mehjoo’s non-domiciled status, there was no obligation to provide advice on every possible tax-saving scheme, especially those outside the realms of their expertise.

It was held that an accountant is not required to advise on highly complex tax schemes unless they have held themselves out as a specialist in that specific area. The court made it clear that a generalist accountant cannot be expected to have specialist knowledge of all tax schemes.

Although Harben Barker was not found negligent in this case, the situation could have been different if there was an expectation or an implicit understanding that they would provide specialised tax advice.

Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36 (Privy Council decision) (auditor negligence)

The case involved Singularis Holdings Ltd, a company set up to manage the personal assets of a Saudi Arabian businessman, and PricewaterhouseCoopers (PwC), a global accounting firm. The core of the dispute was centred on PwC’s alleged failure to detect fraudulent activities in its role as an auditor.

PwC was appointed as the auditor for Singularis. Their responsibility was to audit the company’s financial statements and ensure their accuracy and compliance with relevant financial regulations.

It was claimed that senior figures within Singularis, including its chairman, had misappropriated funds. These activities were alleged to have occurred over a period, during which PwC was conducting its audits.

Singularis, after entering liquidation, brought a claim against PwC, arguing that the accounting firm had failed in its duty to detect and report fraudulent activities.

Privy Council Outcome: The final appeal was heard by the Judicial Committee of the Privy Council. The Council held that PwC did not owe a duty to Singularis to uncover the fraud. It was determined that while auditors have a duty to conduct audits with reasonable care and skill, this does not extend to a duty to uncover fraud, particularly when company insiders are involved in concealing it.

The Privy Council’s decision clarifies that while auditors must conduct audits with reasonable care, they are not responsible for detecting fraud, especially if it is sophisticatedly concealed by company insiders.

Caparo Industries plc v Dickman [1990] 2 AC 605 (auditor negligence)

The case arose from Caparo Industries plc’s acquisition of shares in Fidelity plc. Caparo started buying shares in Fidelity following the publication of Fidelity’s annual accounts, which were audited by Dickman and his firm. After acquiring a significant stake and then a controlling interest, Caparo discovered that the accounts gave a misleadingly positive view of Fidelity’s financial position.

The accounts, audited by Dickman, suggested Fidelity was making a profit, but further investigation by Caparo revealed they were suffering a loss of £400k.

Caparo had made decisions to buy shares based on the audited accounts.

Caparo alleged that Dickman was negligent in auditing the accounts and claimed for the losses they suffered because they had relied on those accounts.

The key legal question was whether the auditors owed a duty of care to Caparo regarding the accuracy of the accounts, given that Caparo was a potential investor and not a client of the auditors.

The House of Lords held that the auditors did not owe a duty of care to Caparo. The court found that the primary purpose of the accounts was for shareholders to exercise control over the company, not to guide investment decisions by potential investors.

This case is significant for establishing a ‘threefold test’ for duty of care:

  1. foreseeability of damage
  2. a sufficiently ‘proximate’ relationship between the claimant and defendant, and
  3. whether it is fair, just, and reasonable to impose a duty.

The House of Lords held that while it was foreseeable that investors might rely on the accounts, the relationship was not sufficiently proximate, and it was not reasonable to impose such a broad duty on auditors.

The decision crucially limited the scope of auditors’ liability, restricting it to the company to whom they owe their duties, rather than to external investors.

Case Example – Negligent Tax Advice

Our negligence lawyers successfully acted for a client who had received negligent tax advice to invest in a tax avoidance scheme which it was alleged would give the client tax relief.

HMRC came to a policy decision that the tax scheme was ineffective and gave our client a tax penalty.

Our lawyers were able to recover significant monies for the client for the losses suffered as a result of the negligent advice and fraudulent tax scheme.

Mediation in Negligence Claims against Accountants and Auditors

Alternative dispute resolution, where suitable, provides many advantages for parties in legal disputes for negligence. Our lawyers are strong advocates for mediation, which can often lead to favourable settlements.

Several of our lawyers are trained mediators and expert negotiators who are registered members of the Chartered Institute of Arbitrators (CIArb) and the International Mediation Institute. Our expertise in mediation gives our lawyers a significant and unique advantage when navigating settlement discussions on your behalf.

If you believe you have been a victim of accountant negligence, it is crucial to seek legal advice promptly. At Go Legal, our team of experienced professional negligence lawyers in London specialises in navigating these complex negligence claims. Our lawyers provide clear, direct guidance and robust representation to ensure you receive the justice and compensation you deserve.

Call us on 0207 459 4037 for a Free Consultation today to discuss your negligence claim and the amount you may be able to recover.


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