I mentioned in a previous blog post yesterday the judgement in the case of the alleged breach of duty by Grant Thornton (GT) when acting as auditors of AssetCo Plc (ASTO) in 2009/10. See https://www.bailii.org/ew/cases/EWHC/Comm/2019/150.html for the full judgement. For those who have not had the opportunity to read all 300 pages of the judgement, here are some interesting points from it:
It was conceded that the audit was negligent in a number of respects, but GT’s defense against the damages claim was based on what it asserted were six “insuperable obstacles”. Some of the key points they made are below:
- They deny that if the true accounting position had been known they could have avoided an insolvent liquidation. Indeed they claim that AssetCo was better off not knowing, in 2009 and 2010, the truth of its own position.
- They claim that the steps that AssetCo took (a scheme of arrangement) mitigated all their losses and otherwise avoided all harm.
- That none of the damage claimed by AssetCo was caused by Grant Thornton but by the directors of the company.
- That the Letter of Representation supplied by AssetCo as part of the audits contained falsehoods and hence GT should be relieved of all liability.
They also disputed the quantum of losses suffered by the company and their entitlement to interest thereon.
The judge concluded that GT’s conduct was “not reasonable”, and upheld the claim. The defense that AssetCo were better off not knowing their true financial position is a very remarkable one indeed! How are companies expected to avoid losses if they do not know their true financial position?
But this case is a good example of how civil claims arising from company fraud are simply too expensive to pursue in most circumstances and take much too long to get into court. Expecting civil claims to discourage bad auditing and somehow police audit work is simply not a realistic proposition.
If GT’s defences had been upheld, it would effectively make it impossible to challenge any incompetent audit work however bad it was and however damaging the consequences. If the case does go to appeal, let us hope the judgement is upheld.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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Every one of those defense points is extraordinary. Did a real barrister present them or was it an employee of Starbucks?
The letter of representation absolutely does not excuse the auditor, although it may give it a basis to sue AssetCo’s directors.
GT were represented by lawyers Clyde & Co LLP, and two QCs – David Wolfson and Simon Colton, and a junior, none of whom I have come across before, not that I mix much in legal circles. Similar line-up on the other side from Mishcon de Reya. Lawyers bun feast as usual.