Accountants, auditors and tax advisers routinely produce statements — signed accounts, management figures, tax computations, comfort letters — that end up in the hands of people who are not their clients. Whether the accountant owes a duty of care to those non-clients turns on the interaction between two House of Lords authorities: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 and Caparo Industries plc v Dickman [1990] 2 AC 605.
Hedley Byrne establishes that a duty of care can arise where the maker of a statement assumes responsibility for its accuracy and the recipient reasonably relies. Caparo restricts that principle in the context of statutory audit: the audit is prepared for the shareholders as a body, not for individual investors or lenders. Exposure to a non-client turns less on the label attached to the document than on what the accountant knew about the intended reader and use.
The audit filed at Companies House does not, without more, create a duty to lenders, investors or acquirers who later pick it up. The auditor's duty runs to the company; a third party who reads the filed accounts is, on the Caparo analysis, outside the duty.
The Court of Appeal in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 confirmed that even where the auditor knew the accounts might be seen by a lender, mere foreseeability is not enough. What is required is closer to a specific communication for a specific transaction.
Where the accountant communicates figures for an identified third party and an identified purpose — a named lender, a named acquirer, a specific transaction — the Hedley Byrne assumption of responsibility can attach. See the entry on assumption of responsibility. A partner who telephones a lender to confirm figures, signs a reliance letter, or addresses a covering note to a named recipient has moved out of Caparo territory and into Hedley Byrne territory.
A reliance letter is an explicit assumption of responsibility. When an accountancy firm addresses a letter to a specific bank or purchaser confirming that the accounts may be relied on for a stated purpose, the firm has done the very thing Hedley Byrne describes. The scope of the duty is defined by the letter — the purpose, the identified recipient, any cap or carve-out.
The Scottish decision in Royal Bank of Scotland plc v Bannerman Johnstone Maclay [2005] CSIH 39 prompted the profession to add a standard disclaimer to audit reports. The court held that where the auditor knew the bank would rely on the accounts and did nothing to disclaim reliance, a duty of care could arise. The industry response — the Bannerman paragraph — is a short statement that the auditor accepts no responsibility to any party other than the company and its shareholders as a body. It is now standard on UK audit reports.
An accountancy firm prepares management accounts for a company client. The client asks the firm to send those accounts directly to a named lender who has requested them in support of a specific facility. The firm knows the lender's identity and purpose. On the Hedley Byrne analysis, the firm has assumed responsibility to the lender unless a written disclaimer is in place.
Compare the same accounts filed at Companies House and later picked up by an unrelated third party in due diligence. The Caparo analysis excludes duty: the firm did not communicate the figures to that party for that purpose, and publication alone does not create the necessary proximity.
The same framework applies to tax opinions and structuring memoranda a client shares with counterparties. Where the adviser knew the note would be disclosed to a specific investor or purchaser and did not qualify or disclaim, Hedley Byrne is available. Where the adviser wrote only for the client and the client re-purposed the note, the position is closer to Caparo.
See also Hedley Byrne v Heller and Caparo for auditors and accountants. For sector guidance, see the accountants' PI insurance guide and the management consultants' PI insurance guide.
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.