Grant Thornton must pay £13.4m in damages to a building society after losing a Supreme Court court case that has clarified the extent of the legal duty of care professional advisers owe to their clients.
The UK’s sixth-largest accounting firm was sued by Manchester Building Society, a former audit client, after Grant Thornton negligently advised the mutual in 2006 that it could prepare its annual accounts using hedge accounting.
The building society relied on Grant Thornton’s advice to expand its lifetime mortgage business and entered into long-term interest rate swaps as a hedge against the cost of borrowing money to fund that business.
However, the method hid the volatility in the building society’s capital position and a mismatch developed between the negative value of the swaps and the value of the mortgages the swaps were intended to hedge. Grant Thornton discovered the error in 2013 and the building society had to restate its accounts and close out its long-term swaps early at a cost of £32m.
A panel of seven justices at the UK’s Supreme Court unanimously ruled on Friday that the losses suffered by Manchester Building Society fell within the scope of Grant Thornton’s duty of care to its client. It said reduced damages should be paid to the mutual to reflect its own negligence.
Anthony Taylor, partner at law firm Squire Patton Boggs who represented Manchester Building Society, welcomed the simplification provided by the court. “The legal test for scope of duty in professional negligence had become narrow and difficult to navigate,” he said.
Janine Alexander, partner at law firm Collyer Bristow, said: “This case forms part of an intensifying focus on the duties owed by accountants, and in particular auditors, when scrutinising the finances of large enterprises.” She added that it was “a reminder that the courts and regulators expect more from them than a ‘box-ticking’ approach”.
The ruling is the latest legal blow to Grant Thornton. Liquidators of Patisserie Valerie are suing it for £200m for failing to spot an alleged accounting fraud at the café chain. The Court of Appeal last year rejected the accountant’s attempt to overturn a £22.3m ruling that held it liable for negligence “of the utmost gravity” for its failure to expose a fraud during its audits of AssetCo, an Aim-listed fire engine leasing company.
Grant Thornton UK said it was “disappointed” by the ruling.
“We always accepted that our audits of the society for the 2006-2011 years fell below the high standards that we strive for and regret the errors in the society’s financial statements that arose from hedge accounting; which our audit team identified and brought to the attention of the Society and the Prudential Regulation Authority in 2013,” it said.
David Harding, chair of Manchester Building Society, said: “We will now work with our advisers and the regulators to establish what the judgment will mean for the Manchester, our members and other stakeholders.”
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