An accountant or auditor engaged by a company signs a letter of engagement that sets the contractual scope of the work. That contract is not, however, the only source of legal duty. A professional adviser may also owe a tortious duty of care that runs alongside the contractual duty, and in some circumstances a duty in tort to third parties who never signed the engagement. This concurrent liability sits at the heart of most substantial professional indemnity claims against the audit and accountancy profession.
The leading authority is Henderson v Merrett Syndicates Ltd [1994] UKHL 5. Lord Goff held that where a professional assumes responsibility for services provided to a client, a duty in tort arises alongside any contractual duty. The claimant may frame the claim in whichever cause of action is more advantageous, subject to any contractual term that expressly excludes the tort route. For accountants and auditors this means that a breach of the engagement letter is also, on the same facts, capable of being pleaded as negligent misstatement or negligent performance of services in tort. The ICAEW Code of Ethics and the FRC Ethical Standard 2019 impose obligations whose breach can be actioned through either route.
Caparo Industries plc v Dickman [1990] 2 AC 605 remains the reference point for who is owed a duty of care by a statutory auditor. The House of Lords held that a statutory audit is prepared for the shareholders as a body, to enable them to exercise their rights of stewardship over the company. It is not prepared for individual investors deciding whether to buy shares, nor for lenders or trade creditors relying on the accounts, absent something more.
ADT Ltd v BDO Binder Hamlyn [1996] BCC 808 showed how a specific assumption of responsibility to a named acquirer — a partner confirming to an intended purchaser that the accounts gave a true and fair view — pulls that third party inside the duty. Killick v PricewaterhouseCoopers [2001] 1 BCLC 65 confirmed that the class owed a duty must be identifiable at the time the advice is given, and the auditor must know, or reasonably foresee, that the advice will be relied on for the transaction in question.
Contract claims run six years from the date of breach under the Limitation Act 1980. That clock starts when the audit opinion is signed. Tort claims run six years from the date the damage is suffered, but section 14A extends that period to three years from the date the claimant knew, or ought to have known, the material facts giving rise to the cause of action, subject to a 15-year long-stop under section 14B. For latent audit defects — undetected fraud, misstated going-concern positions — the tort route with its s.14A extension is often the only viable path. See Limitation Act 1980 section 14A and Henderson v Merrett concurrent duties.
For non-audit accountancy — bookkeeping, management accounts, tax advice, corporate finance support — the duty of care is generally confined to the engaging client. There is no statutory analogue to the auditor's report on which a class of third parties can be said to rely as a matter of course. A tort duty to a third party will only arise where the accountant has specifically assumed responsibility on identifiable facts. The scope of duty in auditor PI claims covers how the courts keep these contexts distinct.
Facts: An audit firm signs a clean opinion on a company's 2017 accounts in April 2018. Undetected sales-ledger fraud comes to light in September 2022. The company continued to trade on the misstated figures and incurred losses that would have been avoided had the fraud been detected in 2018. The company sues in July 2024.
Analysis: The contract claim, six years from signing, expired in April 2024 — contractually time-barred. The tort claim benefits from s.14A: knowledge crystallised in September 2022, and the three-year window runs to September 2025. The tort route is open. A shareholder-derivative claim by minority shareholders has no contract path — the engagement was with the company — so the Caparo tort analysis is the only route, and depends on whether the pleaded reliance falls within the class owed a duty on the specific facts.
Insurance response: The ICAEW PII Regulations 2020 require PI cover that responds to civil liability arising from the professional business, without distinguishing between contract and tort. A compliant policy responds on either footing. The claims-made basis of most PI wordings means the year of notification, not the year of the audit, drives which policy responds.
Engagement letters should state scope, purpose and permitted reliance clearly. A Bannerman-style restriction on third-party reliance narrows the Caparo class and reduces tort exposure. Because concurrent duties can extend the limitation tail beyond six years, run-off cover after retirement or dissolution warrants attention. Apex Insurance Brokers arranges PI cover for accountants and audit firms authorised by the ICAEW and other recognised supervisory bodies. See the accountants PI insurance guide for the wider framework.
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.