The Bolam test, drawn from Bolam v Friern Hospital Management Committee [1957] 1 WLR 582, asks whether the defendant acted in accordance with a practice accepted as proper by a responsible body of opinion skilled in the relevant field. The courts have long applied the same framework to other skilled professionals, including those regulated by the ICAEW, ACCA, ICAS and CAI. For background see the Bolam test.
For accountants and auditors, the practical question in a PI claim is whether the work in dispute met the standard of a reasonably competent practitioner doing the same kind of work. The court is asking whether the approach taken sat within the range that a responsible body of audit or accounting opinion would have endorsed, not whether a more cautious adviser would have done something different.
Expert evidence in audit negligence claims is almost always given by senior ICAEW or ICAS members, and the technical benchmark they apply is the framework in force at the time of the work. That framework includes the International Standards on Auditing (UK) issued by the FRC, the FRC's Ethical Standard for auditors, the ICAEW Code of Ethics and the ICAEW PII Regulations. Tax work is measured against Professional Conduct in Relation to Taxation. M&A due diligence and reporting accountant work is measured against the engagement letter and the relevant ICAEW technical releases.
The Court of Appeal applied this framework to auditors in Equitable Life Assurance Society v Ernst & Young [2003] EWCA Civ 1114, accepting that the standard of care for an auditor is set by reference to the practice of reasonably competent auditors at the time. In Stone Heritage Developments Ltd v Davis Blank Furniss [2007] EWCA Civ 765 the court reinforced that expert evidence of professional practice is central to the negligence question, and that the duty owed depends closely on the retainer.
The Bolitho qualification, from Bolitho v City and Hackney Health Authority [1998] AC 232, applies with equal force. A body of opinion will not protect a defendant if the court concludes that the practice itself is not capable of withstanding logical analysis. In an audit context that bites where the supposed common practice rests on a misreading of the standards, or fails to weigh an obvious risk the standards expressly require the auditor to address. The wider duty-of-care framework, including the third-party reliance issues from Caparo Industries v Dickman, sits alongside Bolam in any audit claim.
An ICAEW-registered audit firm signs off the financial statements of a manufacturing client. Two years later the company collapses and the administrators allege that a material related-party transaction was under-tested and should have led to a qualification or further substantive work. Two ICAEW expert witnesses produce reports. The claimant's expert says the sample size and corroboration were below what ISA (UK) 550 required on the facts. The defendant's expert says the testing was within the range a competent auditor would have applied, given the risk assessment recorded in the working papers.
Under Bolam, the defendant firm escapes liability if the court accepts that a responsible body of audit opinion would have taken the same approach. Under Bolitho, that defence falls away if the judge concludes the approach was not logically defensible on the facts known at the time. The outcome typically turns on the contemporaneous risk assessment, the quality of the working papers and the credibility of the experts under cross-examination. Outcomes vary on the facts.
The Bolam framework is one reason contemporaneous documentation matters so much in accountancy PI claims. The court reconstructs the standard of care from the standards in force at the time and from expert evidence about how competent firms applied them. Files that record the risk assessment, the rationale for sampling decisions, the partner review trail and the engagement letter are the evidence that lets a defendant firm show its work sat within a responsible body of practice.
For background on the cover that responds when these claims arise, see Apex's guides for accountants' PI insurance and for financial advisers' PI insurance.
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.