Liability claims set to surge

When it comes to court room litigation, it has been a good crisis for the accountancy profession.

Frauds are being discovered at records levels, accounting standards are being rewritten, but so far not many accountants have found themselves facing charges of incompetence in court.

But recessions cast long shadows, lawyers warn, and accountants could yet face a rash of liability claims as victims of fraud turn to auditors to recoup money.

Legal experts say auditors could find themselves in court following the downturn, as shareholders and investors look to them for compensation following an expensive and costly fraud.

Auditors have already warned about an expected spike in fraud cases as the recession wears on, in part due to an increased scrutiny on cash flow.

In June mid-tier firm BDO said fraud cost the UK £960m in the first six months of 2009. They expected that figure to rise to £3bn by year’s end.

The following month KPMG found fraud had reached its highest level in the 21 years it had been measuring the phenomena.

At the time, Hitesh Patel, of KPMG Forensic, said the recession had increased the likelihood of fraud. “Even ‘small’ cases can cause extreme stress and suffering to those involved, and create major reputational and financial difficulties for the companies and individuals caught up in them,” he said.

Andrew Howell, partner with Barlow Lyde & Gilbert, believes auditors themselves could become a casualties of fraud. He believes accountants are more likely to be sued as the recession goes on

Auditors are not tasked to discover fraud as part of their audits, but can sometimes stumble across them as part of their testing of a company’s systems. Howell believes in hindsight it can be easy to piece together a case based on possible “red flags” which the auditor may have overlooked.

“What ever the true nature of the auditors legal duty, which is not to complete a compete fraud check, it is all to easy for lawyers a long time after the event to point to a red flag and say ‘if you had done your audit work possibly you would have spotted it’,” he said. “We see it time and time again.”

The FD of Canon’s UK arm has backed the idea of liability caps for auditors. Ed McNally believed it was the only way to ensure the preservation of the audit market, dominated by the Big Four at the highest levels.

The Big Four would collapse under the weight of litigations otherwise. “There is a strong case in my view that there should be a liability cap for audit firms,” said McNally. “It’s an extreme view but there should be a liability limit for doing their work normally- in terms of gross negligence clearly not. There should be a substantial cap but it should not be unlimited.”