PracticeAuditAuditors face new risk despite E&Y victory

Auditors face new risk despite E&Y victory

Greater care may be necessary when auditing subsidiaries about to be sold

Ernst & Young may yesterday have escaped having to pay a massive cost to
former client ERF, a British truckmaker, for negligent work – but lawyers
suggested the broader implications for accountants were ‘less favourable’.

Commenting on the case, which emerged in the appeal court, a presiding judge
suggested that auditors could face greater legal risks when auditing a
subsidiary business that they know is probably going to be sold by its parent
company, the FT reported.

‘Auditors will have to take particular care with regard to their liability
position when auditing a subsidiary which they know is going to be sold,’ said
Richard Swallow of Slaughter & May.

Yesterday a court ruled in E&Y’s favour on the Freightliner case. The
judge ruled that although there was a special audit duty on sales, the issue was
whether E&Y was responsible for the way the subsidiary’s employee had used
the accounts having assured the buyer they were accurate.

E&Y was sued by Freightliner, ERF’s parent company, in relation to fraud
uncovered after ERF had been sold to German truckmaker, MAN.

Freightliner brought a case against ERF’s former auditors, saying that it had
been ‘hoodwinked’ by the frauds.

Further reading:

E&Y heads off £350m Freightliner claim

E&Y facing legal challenge from truckmaker

Truck group wins claim on bad sale

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