The effectiveness of disclaimers and accountants’ duties to third parties
Charles Mather, trainee solicitor in our corporate & commercial team, looks at a recent case concerning disclaimers and accountants’ duties to third parties.
Where accountants receive instructions from both parties entering into a corporate transaction, they can unwittingly assume duties they have tried to avoid.
A recent case concerned an accountant that conducted due diligence on a company for a prospective buyer, and prepared completion accounts following the share purchase. The accountant had also audited the company’s statutory accounts.
What went wrong?
The buyer later discovered an accounting fraud which had inflated the price of the company’s shares, meaning the buyer had overpaid.
The buyer brought a claim against the accountant, alleging it had breached its duty to exercise reasonable care by failing to uncover the fraud on the company.
In its defence, the accountant relied on a clause of its audit contract with the company, which said it had disclaimed responsibility to anyone other than the company and its members.
The accountant applied for summary judgment on the basis that the result of the disclaimer was that the buyer had no realistic prospect of succeeding at trial.
The court’s opinion
The court disagreed, citing the accountant’s continuing relationship with the buyer, and correspondence between the accountant and the buyer’s solicitor – pointing to an ongoing commercial relationship, which rendered the accountant’s disclaimer ineffectual.
The decision casts doubt on the effectiveness of disclaimers by which accountants or other professional advisers attempt to limit their duties to third parties.
Best practice for accountants
To minimise the risk the court’s decision presents, accountants acting on behalf of one or more parties to a transaction should ensure that their contracts and disclaimers are implemented effectively.
Accountants should also be aware of their professional obligations on issues such as due care and conflicts of interest.
Questions & Answers