Audit Firm Held Not Liable in Negligence Claim

Audit Firm Held Not Liable in Negligence Claim

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.

To hear more about the latest AML developments and how to be on the alert for suspicions of money laundering and terrorist financing under the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021, see our latest Anti-Money Laundering webinar here.

All our courses are listed here.

Please also go to our website to see our:

  • Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
  • letters of engagement and similar templates. Please visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
  • ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please contact John McCarthy FCA by e-mail at john@jmcc.ie.

 

  • We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. The ISQM TOOLKIT 2022 is available to purchase here.
Is your AML Firm-Wide Risk Assessment up to Date?

Is your AML Firm-Wide Risk Assessment up to Date?

As far as accountancy firms go, there is a requirement for each firm to prepare an anti-money laundering (AML) written risk assessment (known as the firm-wide or business risk assessment) examining the business/practice in five key areas (more on this below). The legislation that brought this into place is section 30A of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act, 2018, which became effective on 26 November 2018. The various professional bodies are examining these risk assessments in their recent practice inspections.

The risk assessment must be kept up to date but there is little clarification in the legislation about ‘what up to date’ means. If your practice has essentially not changed in structure/number of offices or the services it offers since you prepared your first risk assessment in 2018, now is a good time to give it a brief refresh. If there have been more fundamental changes, including new Partners/services, then a more detailed refresh is required.

More guidance on this topic has been prepared by the Consultative Committee of Accountancy BodiesIreland (CCAB-I) and is available here as CAI Technical Release 01/2019.  The five key areas that must receive attention in the document are:

  • clients – locally based are generally less risky than overseas clients;
  • the products and services provided – bookkeeping is generally less risky than liquidation work;
  • the countries the clients operate in – clients based in sanctioned territories, or Irish clients doing business with such countries are usually prone to more money laundering (ML) risk;
  • the transactions the firm is involved in – decision making on behalf of clients is usually a higher trigger point for risk; and
  • the delivery channels – with remote delivery seen as more prone to ML risk.

There will sometimes be overlap between these risk factors, and this is explained in more detail in the guidance and in the template available below.

A template to help you prepare the Firm-Wide Business Risk Assessment is available here for €60+VAT for immediate download in word format.

For more blogs please visit this link and for our publications and manuals and services click here.

In excess of 100 companies registered at Dublin family home

In excess of 100 companies registered at Dublin family home

A recent article by the Independent revealed that a Rathfarnham family home address had been used in the registration of over 100 companies. See the full article here.

The article reports that two tenants resident at the address, had use the owner’s address without his knowledge.  This highlights a major weakness in the CRO’s procedures for company set up where the trust placed in the ‘self-declaration’ process has been found wanting.

The Office of the Director of Corporate Enforcement (ODCE) and An Garda Siochana were contacted by the homeowner.

A spokesperson for the Department of Enterprise Trade and Employment which oversees the CRO confirmed that the CRO does not verify the identities of directors or secretaries of companies.

This latest development calls into question the serious lack of background verification carried out by the CRO which ensures that the Office never calls into question instances where multiple addresses are listed for the same director, not to mention the increased risk that these businesses could be used for money laundering activity.

A similar problem exists at UK Companies House where a consultation has been carried out called the ‘Corporate transparency and register reform’. Proposals include making companies using the FRS 105/102 accounts frameworks in the UK, declare their turnover, among other recommendations, to help verify that they genuinely qualify for these much reduced disclosure regimes. The results of the consultation have not yet been announced, but similar moves be follow in Ireland.

 

For more about accountants’ AML compliance obligations, see our AML Policies, Controls & Procedures Manual for 2021.

 

The Manual contains all the latest requirements relevant to accountants contained in the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021 now fully in force.  Future blogs will look at various parts of the new and existing provisions of this legislation.

 

For more blogs please visit this link and for our publications and manuals and services click here.

 

The New AML Regulator for Europe

The New AML Regulator for Europe

The European Union has for some time, been trying to work out how best to combat financial crime that impacts EU finances.

Formally launched on 1 June this year, a new office, the European Public Prosecutor’s Office (EPPO) has been created. It was first established in 2017 with powers to investigate and prosecute crimes against the EU’s financial interests including money laundering.

The mandate of the EPPO’s is ‘to investigate, prosecute and bring to court crimes against EU budgets, such as fraud, corruption or serious cross-border VAT fraud’.

The EPPO’s Chief Prosecutor is Laura Codruța Kövesi, the former Chief Prosecutor of Romania’s National Anticorruption Directorate and former Romanian Prosecutor General.

Here is an interview with the new Chief Prosecutor.

The remaining EPPO staff consists of two Chief Deputies and other prosecutors drawn from the 22 participating EU countries.  Unfortunately, Ireland is not participating in the EPPO along with Denmark, Hungary, Poland and Sweden. Sweden is said to join in 2022. Ireland have, however, signed up to the PIF Directive (2017/1371) which protects against the misuse of EU funds, and protecting EU taxpayer’s money. Ireland have the option to join the EPPO at any time.

The EPPO already faces a mountain of work, with over 3,000 reports submitted for action.  According to Kövesi, the first new reports of alleged fraud against the EU budget, were submitted from Italy and Germany and arrived within hours of the EPPO’s online reporting system going ‘live.’ We wish Laura and her team success in the fight against financial crime.

For more about accountants’ AML compliance obligations, see our AML Policies, Controls & Procedures Manual for 2021.

The Manual contains all the latest requirements relevant to accountants contained in the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021 now fully in force.  Future blogs will look at various parts of the new and existing provisions of this legislation.

 

For more blogs please visit this link and for our publications and manuals and services click here.

 

Beneficial Ownership – more consistency needed in the EU

Beneficial Ownership – more consistency needed in the EU

In a May 2021 report by Transparency International (TI) called ‘Access Denied? Availability and Accessibility of Beneficial Ownership Data in The European Union’ the authors explain how the great majority of countries across the European Union (24 out of 27) have a private central beneficial ownership information register in place. The three that do not are Italy, Hungary and Lithuania.

Access to the registers varies a lot across Member states and while some charge an access fee, others charge a fee, the most expensive being Sweden at €27 per request.

In Denmark, one may check all the companies on the register with the same beneficial owner as well as all companies registered at a given address. It is also possible to search by company (exact name or parts of the name) and by beneficial owner.

It’s a pity that the UK is excluded from the report’s findings which, only deal with EU Member states. Nevertheless it’s a very useful tool to help MLROs track beneficial ownership data of their clients.

The report is free of charge and may be accessed here.

For more about accountants’ AML compliance obligations, see our AML Policies, Controls & Procedures Manual for 2021.

The Manual contains all the latest requirements relevant to accountants contained in the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021 now fully in force.  Future blogs will look at various parts of the new and existing provisions of this legislation.

For more blogs please visit this link and for our publications and manuals and services click here.