PracticeAuditProfession still exposed despite Moore Stephens ‘landmark’ win

Profession still exposed despite Moore Stephens 'landmark' win

Law Lords ruling too narrow to mean the entire audit profession can rest easy over the threat of similar negligence claims bankrolled by third-party funding

The House of Lords

The UK’s biggest firms may still find themselves embroiled in legal battles
despite Moore Stephens’ ‘landmark’ win at the House of Lords which upheld a
decision ruling the firm was not negligent in an audit.

The UK’s highest court of appeal rejected a substantial negligence claim
against Moore Stephens concerning fraud at insolvent grain trader Stone &
Rolls.

The Stone & Rolls’ case, originally put at $173.6m (£89m), was one of the
largest so far to be funded by a commercial third party funder.

But Moore Stephens’ defence lawyers believed the Law Lords ruling was too
limited to mean the entire profession could rest easy from the threat of similar
claims.

Tim Strong, of Barlow Lyde & Gilbert, believed the ruling did not apply
to the largest businesses, usually audited by the Big Four, and not controlled
by individual or families, so the leading firms could still find themselves
dragged through the courts.

‘It’s a landmark win but [the ruling] is quite narrow in principle. It’s
relevant for the mid-tier which deal with a lot of “one man companies” and
smaller businesses run by families, but it’s unlikely to have an impact on the
biggest cases,’ said Strong.

‘I wouldn’t expect it to have a huge effect on the Big Four.’

KPMG
in the US has a $1bn claim
hanging over its head for its audit of collapsed
sub-prime property giant New Century.
Deloitte’s
global network
is waiting to see whether it will be hit with a class action
suit from dairy giant Parmalat’s shareholders.

In a 130-page judgment, the Law Lords decided Moore Stephens was not liable
for failing to spot an extensive letter of credit fraud by Stone & Rolls and
the individual who owned and controlled it, Zvonko Stojevic.

The House of Lords upheld an earlier ruling striking out the claim on the
basis that the conduct of Stojevic was to be treated as that of the company, and
so the loss Stone & Rolls claimed arose directly from its own fraudulent
activities.

Strong also warned that litigation funding, the third party process which
bankrolled the case against Moore Stephens would still be a threat in the
future.

‘I don’t think the decision will necessarily hold [litigation funders] back,’
he said.

Clare Canning, partner at law firm Mayer Brown added: ‘This is a judgment
which addresses complex legal issues in order to reach a conclusion that might
be thought to be one of common sense – that a fraudulent corporate vehicle
should not be allowed to pursue a claim against its auditors for losses suffered
as a result of its own fraud.

‘It is encouraging that their Lordships decision is founded on the nature of
the auditor’s duty of care, reminding us as it does that all claims against
auditors are grounded in the nature of that duty and those to whom it is owed.

‘Such claims do not arise because the auditor has a deep pocket.’

Richard Moore, senior partner at Moore Stephens said: ‘We are naturally
pleased with this outcome. We have said from the outset that we considered the
claim against us should fail and the House of Lords’ decision has vindicated our
position.’

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