Litigation funding poses threat to auditors

‘This case illustrates the growing trend of seeking to blame auditors for the results of fraud in companies. In that context, litigation funding is a concern to auditors and their professional indemnity insurers,’ said Peter Ellingham, a partner at City law firm Kennedys.

Moore Stephens is currently facing a claim alleging audit negligence, which is being bankrolled by the controversial method.

Litigation funding involves third parties bankrolling legal action, in return for a share of the potential damages. It is seen as particularly worrying for auditors, where mind-bogglingly large claims are often filed.

Liquidators appointed from business recovery group Benedict Mackenzie gave the green light for law firm Norton Rose to set up the arrangement with IM Litigation Funding.

The liquidators are seeking to recoup cash on behalf of their creditors (which include HM Revenue & Customs) in the wake of agricultural produce trader Stone & Rolls’ collapse in 2002.

Ellingham added: ‘On the one hand, no one would suggest it is fair that a bona fide claim should be constrained by a lack of funds. On the other, in general terms, and with no reflection on the specifics of this claim, there is an inevitable concern when an action is funded by a third party with a purely financial interest in the outcome.’