Key developments in 2019
The duty of care in accountancy claims was the subject of two key cases in 2019.
In AssetCo, the High Court stated for the first time that auditors can be liable for a company's trading losses caused by a negligent audit.
This widening of the scope of auditors' liability may appear to be bad news for accountancy firms and their insurers; however there are caveats in the judgment which soften the blow.
Firstly, there is a carve-out in relation to dividends and other 'intervening acts' on the part of directors which do not fall within the scope of an auditor's duty. It also appears likely that in cases such as this one (particularly those involving dishonesty by management) the company will be liable for contributory fault, which will reduce the loss attributable to the negligent auditor.
The profession can also draw some comfort from the earlier decision of Manchester Building Society, in which the Court of Appeal reiterated the basic principle that auditors will only be liable if they assume responsibility for the decision-making that leads to losses.
The key question was held to be whether the auditor was giving 'advice' or merely providing 'information'. Where an auditor is 'responsible for guiding the whole decision-making process' they may be liable for all foreseeable financial consequences. Otherwise, the negligent auditor can only be responsible for the direct consequences of their advice being wrong. In this case, that meant a liability of just a few hundred thousand pounds instead of tens of millions. This decision provides a useful framework for Insurers to assess the potential exposure to a claim at an early stage.
What to look out for in 2020
A long-anticipated shake-up of the audit sector remains on the cards and has been thrown into the spotlight once more following the collapse of Thomas Cook (which is being investigated by the FRC).
Following reviews of the audit market by Sir John Kingman and the CMA, we now await the results of a third independent review into the sector (this time led by Sir Donald Brydon).
We have already seen an overhaul of the audit regulator, which is due to be replaced by a new oversight body, the Audit, Reporting and Governance Authority. As predicted in our last annual insurance review, the 'going concern' standard has also been strengthened in response to recent enforcement cases and well-publicised corporate failures.
The regulatory environment is however set to change further. A key area to watch out for will be whether or not the scope of audit is extended to specifically include the detection of fraud (which has never been a statutory requirement).
The market already appears to be gearing up for the possibility of joint-audits, creating opportunities for so-called 'challenger firms' outside of the big four. We expect this trend to continue; however there are unresolved issues in relation to litigation risk, such as the scope of joint and several liability in the case of mandatory joint-audits.
While there appears to be a renewed momentum behind the calls for audit reform, much depends on the level of political will to implement proposed changes in the coming year.