A recent UK High Court case reported in January 2024 makes interesting reading. The auditors were cleared of any liability in a claim for negligence brought by their former client.
A claim for negligence was made by a Travel firm called Ickenham Travel Group (Ickenham) against its auditors, Tiffin Green (TG) Ickenham alleged that as a result of the auditors’ negligence Ickenham achieved £6m less than it could have achieved otherwise, when it sold a business division called BTD.
The claim stated that TG were:
- Negligent and
- In breach of contract;
- Failed to identify various irregularities and an understatement of £4.5m in the financial statements (caused by overstated creditors);
- For each of the four years ended 30 September 2014, 2015, 2016 and 2017 in which they audited Ickenham.
Ickenham stated that if the error had been identified, the company could have taken action to address the amount and avoid any recurrence of the issue.
Ickenham is a travel agency and that had two divisions until July 2019:
- a business travel division called ‘Business Travel Direct (BTD)’ and
- a consumer travel agency, called ‘LetsGo2’.
In early 2019, Ickenham discovered serious irregularities in its accounting systems and records, which originated before the FY14. As a result the trade creditors of LetsGo2 were overstated by £4.5m (the ‘understatement’). In 2019, the combined turnover of LetsGo2 and BTD was £95m, so the understatement was material, even though the accounting problems only related to LetsGo2.
The £4.5m understatement is believed to have built up over a long number of years and started before TG was appointed. It was accepted by Ickenham at the end of the trial that the understatement was at least £2.5m in September 2014 when TG were first appointed. TG first identified the understatement before completion of the audit of the FY 2018 , when new auditors were appointed.
In response to Ickenham’s claim, TG said that BTD was sold for its true value and among other matters was not the ‘type of loss for which TG was liable’.
The Court agreed with the expert witnesses for both sides who gave evidence at the trial and concluded that ‘a reasonably competent auditor probably would have identified and alerted Ickenham to the irregularities and understatement’. TG had failed to do so and had accordingly breached their duties as auditors in both contract and tort by failing to act as a reasonably competent auditor.
These breaches included:
- failing to identify the understatement of £4.5m and
- failing to identify the irregularities’.
Judge Tinker ruled in favour of TG stating that Ickenham had failed to prove that it suffered any loss when it sold BTD, rejecting the loss and factual causation argument.
In the writer’s opinion the claimant would be more likely to have made a more successful case if they had made a different type of claim.
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