A construction company ("the company") was negligently managed by its directors. However, the fact of this negligent management was not apparent from the audit reports produced by the company's auditors ("the auditors") over a period of more than five years. The company went bankrupt following which, the claimants (people who purchased houses being built by the company) had to pay different construction companies to continue building the houses which had not been completed by the company. The Spanish Supreme Court held that the audit reports had not been correctly executed. The court therefore delivered a verdict of guilty to the auditors, its auditor identified "JMFR." (the person who actually audited the company over that period of time), and the auditors' insurer (a branch of an EU insurer operating in Spain). The three parties were ordered to reimburse one thousand of those people affected by the bankruptcy of the construction company. The judgment established that there was a "negligent act of the drafters of the reports, required and necessary for the claimants so as to understand the situation of the Company". It also says that the reports did not contain any warnings in relation to the irregularities of the annual accounts - the irregularities in the annual accounts made by the company's directors over the years, should have been taken into account by the auditors in their reports. The Supreme Court sentenced the auditors, JMFR and its insurer, to reimburse the claimants who had had to pay other companies to complete the building of their houses. The total amount awarded to the claimants amounted to seven percent of the initial building costs. The ruling concludes that all of them have to respond jointly "not only to the one who are bound by the Contractual Relationship, but also to third parties who enter into relationship with the audited Company", in accordance with the European Directive number 2006/43/CE that regulates auditor's conduct.

Supreme Court

Civil Division

16 February 2011