This is a hypothetical case study. Practice B, Company C, and figures are illustrative only. No real firm or claim is described.
The Supreme Court's decision in Manchester Building Society v Grant Thornton [2021] UKSC 20, handed down alongside Khan v Meadows [2021] UKSC 21, recast the way courts approach scope of duty in professional negligence. For auditors and their professional indemnity brokers, the change is more than academic. It shapes which losses a claimant can recover, how insurers reserve, and how a settlement is likely to be framed. This entry walks through a worked, anonymised scenario to show how the analysis runs in practice.
Practice B is a mid-tier firm of chartered accountants. Between 2019 and 2022 it audited Company C, an owner-managed wholesaler with a turnover of around £18 million. Inventory sat on the balance sheet at roughly £4.2 million each year. In early 2024 a new finance director identified that the warehouse manager had been systematically overstating stock counts, inflating year-end inventory by between £900,000 and £1.4 million across the four audited years. The fraud came to light after a physical count triggered by an insurance re-valuation.
Company C entered a company voluntary arrangement in mid-2024. The shareholders and a creditor-appointed director issued proceedings against Practice B alleging that a properly conducted audit would have detected the inventory misstatement, and that the failure to do so allowed the company to continue trading and to incur further losses.
The claimants sought roughly £3.6 million, comprising continuing-trade losses (further trading deficits between 2020 and 2024), dividends paid to shareholders on the strength of overstated profits, and the wasted cost of restructuring advice. Practice B, through its ICAEW-compliant PI insurer, denied breach and, in the alternative, denied that the losses fell within the scope of its duty. See also scope of duty in auditor PI claims.
The Supreme Court's reformulated approach asks a series of connected questions: was there a duty; what was the scope of that duty (what risk did the professional undertake to guard against); was there a breach; is the loss within the scope of duty; and is it factually and legally caused. The old SAAMCo counterfactual, though not abolished, is now a cross-check rather than the primary test.
For Practice B, the scope of duty question is decisive. An auditor's duty, following Caparo v Dickman [1990] 2 AC 605, is to report on the truth and fairness of the financial statements. It is not, without more, to advise on whether the company should continue to trade, nor to underwrite management's commercial decisions. That framing narrows the recoverable loss substantially.
Ask what Company C would have done had the 2020 audit correctly identified the inventory overstatement. On the balance of probabilities the directors would have investigated, restated the accounts, and either pursued the warehouse manager or restructured the business. The trading losses that flowed from continuing to trade on false figures fall within the risk the auditor took on. The dividend payments, made in reliance on overstated distributable reserves, also fall within scope. The wasted restructuring costs incurred in 2024 are more marginal and would have been argued as too remote.
Practice B's defence advanced contributory negligence, pointing to weak internal controls and the finance function's failure to reconcile stock. Under the Civil Liability (Contribution) Act 1978 and the general principles of contributory fault, a discount in the region of 25 to 40 per cent was realistically in play. The claim settled at mediation for £1.65 million, reflecting scope-of-duty reductions, contributory fault, and the litigation risk on both sides. See also advice versus information cases.
Practice B's ICAEW-compliant policy, written to the ICAEW Professional Indemnity Insurance Regulations 2020, responded to the claim. Two features shaped the recovery. First, aggregation: the insurer treated the four audit years as arising from a related series of acts or omissions and applied a single limit. Had they been treated as separate originating causes, the limit would have stacked. Second, the client's duty of fair presentation under the Insurance Act 2015 was tested when Practice B disclosed a partner-level knowledge point at renewal; the insurer waived the point rather than seek a remedy, but the incident illustrates how notification discipline and renewal disclosure interact.
Three practical lessons emerge. Professional scepticism is not a phrase for the file; it is a working posture that should have prompted independent counting or third-party stock confirmations once the same warehouse manager was signing off counts in four successive years. Inventory testing needs a rotational element and an unannounced attendance. And the fraud triangle — pressure, opportunity, rationalisation — was present and visible in the client's structure, which a fresh senior review would likely have flagged.
For the PI dimension, early notification, careful reservation of rights, and considered engagement with the insurer's panel solicitor materially affect outcome. See also 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. The case study is hypothetical and does not describe any real firm or claim.