Negligence claims against accountants

 

Negligence claims against accountants

There are several areas where an accountant may be in breach of duty but the most common are:

  • failing to identify a fraud when auditing accounts. These kinds of claims increase in a recession because financial stress encourages fraud and because a recession tends to cause fraudulent schemes to be exposed. There have been some really high profile frauds from “Ponzi” schemes to large scale fraudulent reporting like Enron. Accountants who audited these companies are facing large claims but there are also a lot of smaller frauds which are resulting in negligence claims against accountants.
  • negligently over valuing company assets. Company valuations will typically be far more volatile in a recessionary environment. In the credit crunch several banks held packages of debt with exposure to sub-prime mortgages. Some claims have started to surface against accountants for negligently failing to correctly value the banks’ assets because the debt has proved to be worthless and their share prices fell as a result.
  • negligently miss-selling schemes designed to reduce or defer income or Capital Gains Tax and/or failing to adequately warn of the risks of  successful challenge by the tax man. The Revenue is taking a much harder line on taxpayers to get in more revenue in the recession. This strategy has undoubtedly led to client’s blaming their tax adviser for the financial consequences of the fall out. Tax advisers used to be able to reach a deal with HMRC as part of an overall settlement of any outstanding tax liability. When the Revenue refuses to settle taxpayers are hit twice because they have paid the adviser’s fees and then have to meet a demand for the outstanding tax owed, interest and any penalties. The taxpayer may then bring a professional negligence claim against their tax adviser in the hope they might be able to reclaim these payments from him. The extent to which the adviser warned of the risk of challenge is an important consideration in this sort of litigation.