AssetCo plc v Grant Thornton UK LLP [2020] EWCA Civ 1151 concerned an audit that negligently failed to detect that the company's management was perpetrating a fraud. Because the audit was clean, the company continued to trade, paid dividends and bonuses it could not afford, and lost sums it would otherwise have retained. The Court of Appeal upheld a substantial award against the auditors.
The case is important for confirming that, where an auditor's negligence allows a company to continue trading in reliance on accounts that concealed its true position, the resulting trading losses may be recoverable - distinguishing Galoo on the facts. The court accepted that the losses flowed from the company's reliance on the negligent audit, not merely from the opportunity to trade.
A recurring defence in audit claims is that the company's own management was at fault, and that this fault should be attributed to the company to reduce or extinguish the claim. The courts approach attribution carefully: the fraud of directors is not always attributed to the company when the company is suing the auditor whose job was to detect that very fraud. This limits the reach of the illegality and contributory-negligence defences in fraud-detection cases.
AssetCo is a reminder that audit claims can be very large. Where negligence permits a fraud to continue, the recoverable loss can run to many millions. Firms auditing companies with weak governance or complex structures carry a materially higher risk, which should be reflected in the limit of indemnity they hold.
The decision underlines two points for cover. First, the sums at stake in audit claims justify careful attention to the limit of indemnity. Second, contributory negligence and attribution arguments, while valuable, do not reliably cap exposure in fraud-detection cases. Apex discusses limit-setting for higher-risk engagements on the accountants PI guide, and quantum in these disputes often turns on expert witness evidence.
The two cases can look contradictory - Galoo denies recovery for trading losses that a negligent audit merely permitted, while AssetCo allows recovery for trading losses that flowed from reliance on an audit that concealed a fraud. The reconciliation lies in reliance and purpose. In AssetCo the whole point of the audit was to give a true picture on which the company would rely in continuing to operate, and the losses were the direct product of relying on a false picture. In Galoo the losses were driven by independent commercial decisions rather than by reliance on the specific inaccuracy. The distinction is fact-sensitive, which is why audit claims are so heavily litigated on causation.
For an audit firm, AssetCo confirms that the more central the audit is to a client's continued operation, the wider the potential exposure if the audit fails. Firms auditing companies that depend on clean accounts to keep trading, raise finance or reassure regulators are carrying a correspondingly larger risk, and that risk should inform the limit of indemnity they hold rather than being left to a default figure.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.