Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 is the modern restatement of the SAAMCO scope-of-duty principle, and it arose from an accountancy and audit engagement. For ICAEW and ACCA-regulated firms, and for the PI insurers behind them, it is the case that anchors how losses from negligent professional work are measured.
Grant Thornton had advised Manchester Building Society that hedge accounting could be applied to certain interest rate swaps. The advice was wrong. When the position had to be unwound the society crystallised significant losses. The argument turned on whether those losses sat within the scope of the auditor's duty, or whether they were market losses the society would have suffered in any event. Audit firms followed the appeal because the answer would set the boundary for a generation of claims against accountants and auditors.
Before Manchester Building Society, the leading authority on auditor liability to third parties was Caparo Industries plc v Dickman [1990] 2 AC 605. Caparo set a narrow duty: a statutory auditor owes a duty to the company and to shareholders as a body for stewardship, not to individual investors or acquirers relying on accounts for transactional purposes. That limitation still controls who can sue. Manchester Building Society sits on top of Caparo and controls how loss is measured once duty is established.
The Supreme Court set out six questions for a professional negligence claim:
For accountants and auditors this matters most at stages two and four: what was the engagement for, and is the loss the materialisation of that risk.
Where an accountant advises on a specific tax planning point and the advice is wrong, the loss usually sits within scope: the additional tax, interest and HMRC penalties that flow from the error. Wider commercial losses from an unrelated downturn in the client's business will normally fall outside scope.
Manchester Building Society itself is the worked authority. Advice on whether a particular accounting treatment is available is information rather than full transactional advice. The auditor is responsible for the consequences of that information being wrong, not for the wider commercial outcome.
Reporting accountants giving due diligence on a target are responsible for the accuracy of the figures and disclosures in the report. They are not normally on risk for post-completion trading losses driven by market or management factors the report did not purport to assess.
An accountancy firm signs off financial statements that overstate the net assets of a target company by £2m. A buyer relies on those statements and pays £2m more than it would otherwise have done. After completion the business suffers further trading losses of £800k because of wider market conditions unconnected to the audit. Applying the Manchester Building Society framework, the auditor's liability is restricted to the £2m overstatement, because that loss is the fruition of the risk within scope. The £800k market loss falls outside scope and is not recoverable from the auditor, even though it would not have been suffered but for the acquisition.
The ICAEW Professional Indemnity Insurance Regulations require member firms to hold cover at prescribed minimum limits, with the limit scaling with gross fee income. Audit firms also use engagement letters to set proportionate liability caps, exclusions for consequential loss and aggregate limits per matter. Scope-of-duty analysis runs alongside those contractual provisions: a well-drafted engagement letter narrows what the firm is being asked to do, which in turn narrows the risks the law treats as within scope. Apex sees engagement letter wording reviewed at PI renewal because insurers price on the scope of work the firm actually takes on.
Further reading: SAAMCO principle and scope of duty and Manchester Building Society v Grant Thornton. Sector context: accountants PI insurance, IFA PI insurance and management consultants 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.