Caparo Industries plc v Dickman [1990] UKHL 2, [1990] 2 AC 605 is the starting point for almost every professional negligence claim against an auditor in England and Wales. Caparo bought shares in a company in reliance on audited accounts, then alleged those accounts were misleading and sued the auditors. The House of Lords held that the auditors owed Caparo no duty of care as a purchaser of shares.
Lord Bridge distilled the modern test for a duty of care in respect of economic loss into three elements. There must be foreseeability of harm, a relationship of sufficient proximity between the parties, and it must be fair, just and reasonable to impose a duty. Applied to auditors, the statutory audit is prepared for the company's members as a body, to enable them to exercise their governance functions - not to guide individual investment decisions. A stranger who happens to read the accounts and relies on them is generally outside the scope of the duty.
The practical effect is that an auditor's exposure depends on who the auditor knew, or ought to have known, would rely on the audited figures and for what purpose. Where the auditor is aware that a specific person will rely on the accounts for a specific transaction, proximity may be established and a duty may arise. This is the fault line on which many accountant claims are argued.
Caparo does not remove the need for cover. It shapes the argument once a claim is made. A firm that provides accounts, reports or comfort letters to identified third parties - lenders, purchasers, funders - takes on a proximity risk that a routine statutory audit does not. The demands and needs behind an accountant's PI limit should reflect the transactions the firm actually touches, not just its audit turnover. Apex discusses this scoping exercise on the accountants PI guide, and the same duty-of-care reasoning shapes claims against financial advisers who rely on third-party reports.
Caparo is frequently paired with the assumption-of-responsibility line from Hedley Byrne, because the two together determine whether a duty exists at all. The distinction matters at notification: a circumstance involving reliance by a known third party is materially different from one confined to the audited company.
The threefold test is no longer applied as a rigid formula in every case. In Robinson v Chief Constable of West Yorkshire [2018] UKSC 4 the Supreme Court cautioned against treating Caparo as a universal touchstone, favouring an incremental approach that reasons by analogy with established categories of duty. For accountants and auditors, however, the categories are well settled: liability for negligent statements relied on by identified recipients remains governed by the proximity and assumption-of-responsibility analysis that Caparo and Hedley Byrne together supply. The practical questions a firm should ask about any piece of work are therefore unchanged - who is the intended recipient, what did they need the work for, and has that reliance been made clear or, where appropriate, disclaimed.
Before releasing a report, an accountant can usefully record the client, the purpose, any third parties known to be relying, and the basis on which the work is provided. That record is the evidence a PI insurer and a defence solicitor will want if a claim follows, because it fixes the scope of the duty at the time the work was done rather than reconstructing it under the pressure of litigation.
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.