Following its decision last year in Manchester Building Society v Grant Thornton UK LLP  EWCA Civ 40, the Court of Appeal has handed down another judgment analysing issues of scope of duty, and the application of "SAAMCO" principles, in the context of a claim against auditors.
AssetCo Plc and its subsidiaries carried on business related to fire and rescue services. Grant Thornton (GT) were appointed to audit the accounts of AssetCo for the years ending 31 March 2009 and 31 March 2010.
GT admitted that, during its audit work, it failed in its duty to identify certain instances of management fraud. GT accepted that it should not have given an unqualified audit report on the 2009 and 2010 accounts. GT also accepted that, if it had applied appropriate professional scepticism and competence, it would have uncovered many (if not all) of the dishonest misrepresentations and false evidence provided to it by the AssetCo senior management during the audit process.
It was common ground between the parties that, but for such admitted breaches of duty, the business of AssetCo would more quickly have been shown to be unsustainable. AssetCo alleged that, had this been revealed by GT, then steps would have been taken to (among other things) stop the management of AssetCo from continuing to make substantial payments to AssetCo's loss-making subsidiaries.
GT denied that such a "counterfactual" situation would have unfolded as alleged by AssetCo, or that any such trading losses were recoverable from GT in any event.
At First Instance, the Judge found that the alleged counterfactual scenario would have occurred. The Judge also held that the trading losses suffered by AssetCo from 2009 onwards fell within the scope of GT's duty as auditors, and were not too remote to be recoverable. GT was ordered to pay damages totalling £23.36 million.
The appeal was brought by GT on three grounds. The first of these grounds, which is the focus of this article, was that the Judge at First Instance had failed properly to apply "SAAMCO" principles when deciding whether the trading losses suffered by AssetCo could be said to fall within the scope of GT's duty as auditor.
GT's appeal was, for the most part, dismissed.
The lead Judgment in the Court of Appeal was given by Richards LJ. On this "scope of duty" issue, the Judgment provides a summary of the principles governing the extent of a defendant's duty to protect a claimant against loss caused, on a "but for" basis, by the defendant's breach of duty.
To that end, Richards LJ discusses the importance of determining whether the professional defendant was "providing information" or "giving advice". In an "advice" case, the defendant has a duty to protect the claimant against the full range of risks associated with entering into a transaction. On the other hand, in an "information" case, the defendant has supplied only a part of the material on which the claimant decided to enter into the transaction; the identification of other considerations, and the overall assessment of the merits of the transaction, are matters for the claimant. It follows that, in an "information" case, the defendant is "liable only for the financial consequences of [the information] being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater". Put another way, the defendant is not liable for consequences which would have occurred even if the information had been correct.
In applying such principles to AssetCo, Richards LJ's leading Judgment can be summarised as follows:
- Unlike a professional providing advice or information on a particular aspect of a proposed transaction (that being the classic "SAAMCO" scenario), an auditor is performing a statutory duty which relates to all matters which the directors are required to report in their company's accounts.
- Nevertheless, there is no substantial reason why the SAAMCO principles cannot, or should not, be applied to determine whether particular losses come within the scope of an auditor's duty when signing an unqualified audit certificate.
- The scope of an auditor's duty is determined by reference to the purposes of the statutory requirement for an audit.One such principal purpose is to afford a company the opportunity to call its senior management into account, and to ensure that errors in management are corrected.In the present case, GT failed to detect the dishonest concealment of substantial losses suffered by AssetCo, and the group's insolvency.This failure deprived AssetCo of the opportunity to call its senior management to account.
- A key question was whether the trading losses suffered by AssetCo, in funding its subsidiaries after the 2009 audit, fell within the scope of GT's duty.As to this, a major part of the case against (and accepted by) GT was that, at the time of the audit, the AssetCo business was ostensibly sustainable only on the basis of the dishonest representations or unreasonable decisions made and taken by management, which GT failed to detect.In breach of duty, GT deprived AssetCo of the very information that would have caused it to cease its loss-making activities, and to take steps necessary to regain its solvency.For "SAAMCO" purposes, the "information" provided by GT to AssetCo was wrong.Such negligence was not merely the occasion for the losses which AssetCo continued to incur, but was a substantial cause of those losses.For these reasons, GT was held liable for the losses incurred by AssetCo in continuing to support its loss-making subsidiaries following the audit.
- On the other hand, AssetCo also suffered loss as a consequence of one of its directors misappropriating company funds for his own personal benefit (referred to as the "Jaras transaction") after 2009.There was no negligence on the part of GT, in respect of transactions of this type, in its conduct of the 2009 audit.While GT's negligence may have allowed the director to perpetrate this fraud (in the sense that AssetCo's business was allowed to continue under its existing management from 2009 onwards), this is only "but for" causation.Such losses did not fall within the scope of GT's duty as auditor, because the Jaras transaction did not exist as at 2009 and there was no reason for GT to anticipate it.
Since the SAAMCO judgment was handed down by the House of Lords in 1996, its principles have been applied in a range of different situations involving professional defendants operating in various fields. Important recent examples include the Supreme Court decision in BPE Solicitors v Hughes-Holland  UKSC 21, and the Court of Appeal decision in Manchester Building Society. Both of these cases applied SAAMCO principles, with claimed losses being found to fall outside the scope of the professional's scope of duty.
The Court of Appeal decision in AssetCo found that a substantial amount of the losses claimed fell within the scope of GT's responsibility, but in the face of a unique fact-pattern. The key aspect was the finding that AssetCo's business – and the trading losses being claimed – could not have been sustained at all but for the dishonesty on the part of the existing management, which GT failed to identify. This allowed all such trading losses to be brought within the scope of GT's duty. If it had been established that AssetCo's business was still sustainable (at least in some respect) but for such dishonesty, then it would likely have been more difficult for AssetCo to draw a clear, substantial causal link between GT's shortcomings, and AssetCo's post-2009 losses. This may have led to a different outcome. In this respect, the Court of Appeal did not criticise its own previous decision in Galoo Ltd v Bright Graeme Murray  1WLR 1360, CA.
While claimants may be encouraged by the Court of Appeal's decision in AssetCo, therefore, the truth is that it does little – if anything – to ease the burden, upon a claimant, of showing that claimed losses fall within the scope of the defendant professional's duty (as well as establishing legal and factual causation). Indeed, this is illustrated by the way in which the Court of Appeal allowed GT's appeal in respect of AssetCo's "Jaras transaction" losses.
From the perspective of auditors, the AssetCo decision does serve to emphasise the nature and extent of responsibility that an auditor assumes when conducting a statutory audit, and issuing an unqualified audit opinion. If an auditor, in breach of duty, fails to identify dishonest conduct on the part of a company's management, the ongoing losses flowing from such failures could be wide-ranging and substantial. Such losses may be recoverable from the auditor insofar as they are substantially linked to the auditor's errors.
Originally published 18 September, 2020
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