When a company enters insolvency, the priority for IPs and liquidators is clear: to identify and realise recoveries for the benefit of creditors. While attention often focuses on claims against directors, third-party advisors such as auditors can also be a significant, yet frequently overlooked, source of recovery.

However, bringing these claims can be complex and costly. This is where Annecto Legal can provide vital support. We can assist clients in obtaining legal finance to address any potential legal disputes that may arise.

Understanding Auditor Negligence

Auditors have a duty to exercise reasonable care and skill when examining and reporting on a company’s financial statements. Their role is to provide assurance that those accounts give a true and fair view of the company’s financial position.

However, when auditors fail in this duty, their negligence can directly contribute to losses suffered by creditors, shareholders, or the company itself.

Common examples include:

• Failing to identify or report irregularities or fraud within the company.
• Not challenging management’s assumptions or accounting estimates.
• Overlooking breaches of accounting standards or internal controls.
• Issuing unqualified audit opinions despite warning signs of insolvency.

Such failures may allow mismanagement to continue unchecked, worsening the company’s financial position and deepening the deficit available to creditors.

The Opportunity for Insolvency Practitioners and Liquidators

For IPs and liquidators, identifying potential auditor negligence claims can make a material difference to recoveries. While these cases can be complex, they are often supported by clear audit trails and documentation. Where an auditor’s negligence can be linked to quantifiable losses, claims may be pursued by or on behalf of the insolvent estate.

Auditor negligence claims can arise in a range of insolvency contexts, for example:

• Trading while insolvent – Where auditors failed to flag the company’s deteriorating position.
• Fraudulent trading or misfeasance – Where audit failures masked misconduct.
• Corporate governance failures – Where poor oversight went unchallenged by auditors.

Such claims may also complement or strengthen actions against former directors or other advisers.

Identifying and Quantifying Auditor Negligence Claims

Not every audit failure will give rise to a viable claim, so IPs and liquidators need to carefully assess the potential for recovery before proceeding. Successful claims generally require clear evidence that:

1. A duty of care was owed – auditors owed a duty of care to exercise reasonable skill and care in examining the company’s financial statements.
2. Breach of duty occurred – there was negligence, oversight, or failure to detect material misstatements, fraud, or mismanagement.
3. Causation is demonstrable – the auditor’s breach directly contributed to losses suffered by the company or its creditors.
4. Losses are quantifiable – the financial impact can be measured, often with the assistance of specialist professional accounting experts.

By identifying these warning signs early, IPs can prioritise claims with the strongest prospects, allocate resources efficiently, and maximise returns for creditors. Expert analysis is often essential to quantify losses accurately and build a compelling case against negligent auditors.

Auditor Negligence Funding Options

Audit negligence claims can represent valuable recovery opportunities for insolvency estates, but they are often complex and costly to pursue. The potential exposure to adverse costs and disbursements can deter even the strongest claims, particularly where the estate has limited assets.

To overcome these challenges, Annecto Legal provides access to a range of funding and Commercial Legal Expenses Insurance (LEI) solutions that allow claims to proceed without financial risk to the insolvent estate or the office-holder:

After-the-event (ATE) legal insurance is generally used to protect from adverse costs risks & Security for Costs requirements. ATE insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award.

The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.

Third party litigation funding can be used to investigate and pursue claims, in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.

In some scenarios, simply assigning claims to a third party can be the best option, although it’s important to meet regulatory requirements before doing so, and using a broker to search the market is an effective way to ensure compliance.

How can Annecto Legal assist?

When handling auditor negligence matters, insolvency practitioners and liquidators are obligated to explore all options available in such cases. At Annecto Legal, we assist a wide range of clients in finding the appropriate funding, after-the-event (ATE) insurance and assignment options.

Annecto Legal regularly assists licensed insolvency practitioners and liquidators who are involved in dealing with auditor negligence cases. If you are in the process of bringing or defending an auditor negligence claim and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.