Professional negligence A case of being named, blamed and shamed

First, there is the knock to your pride and ego that comes with direct criticism of your work and advice.

However, more tangibly, such claims can be very expensive even if the actual damages are covered by an indemnity policy. There will be an excess to pay and, typically, many hours will be spent in defending the action and justifying the standard of work undertaken.

Nevertheless, where the standard of work performed by a professional falls short of reasonable standards and a client suffers a loss as a consequence, then it is only right that the client should be able to make a claim for damages.

Duty of care
Establishing liability in professional negligence cases depends on demonstrating that the defendant owes a duty of care to the claimant, that the duty of care has been breached and, critically, that a loss arose from the breach.

A forensic accountant can be instructed in cases of alleged professional negligence either to report on the liability or quantum of the case. Clearly, a forensic accountant can normally comment only on liability if the advice under dispute is accountancy-related. A forensic accountant with relevant experience can then consider the work undertaken and comment on whether the standard of work was reasonable in the circumstances and whether the loss was attributable to the disputed advice.

I have come across numerous examples of potential negligence claims from a cross-section of professional advisers:

• Tax advisers missing deadlines or advising tax schemes which fail
• Auditors not discovering errors or improper adjustments in financial statements
• Solicitors drafting documents incorrectly, not registering title to assets or missing limitation periods
• Surveyors overvaluing assets or missing defects.

It is surprisingly often the case that professionals undertake relatively small assignments for a modest fee which result in significant losses. Sometimes tasks are performed which are supplemental to the original instruction and appear relatively inconsequential.

Professionals always need to guard against complacency, particularly among senior staff who may not be principals of the firm but are under pressure to meet targets. They may fear the wrath of their superiors more than the remote chance of a negligence claim being brought against the firm!

For example, a protracted corporate finance transaction may require the financial assistance (‘whitewash’) procedure immediately prior to completion. This requires the auditors to report on the procedures adopted by the directors of the company in making a Statutory Declaration that the company is solvent and will remain so for at least one year after the deal.

Tight deadline
The auditor may well be from the same firm as the corporate finance team which is completing the deal. I have seen cases where the auditors may not have undertaken all the expected procedures, presumably assuming that little work was required.

Such attitudes should be seen perhaps in the context of a long-drawn-out transaction which suddenly requires completing to a very tight deadline. The corporate finance team may already have exceeded the budget for the work and put pressure on an auditor from within their firm to undertake the whitewash work quickly.

At this stage the buyers and vendors have agreed the deal and funding has been confirmed.

The last thing anyone wants or expects is for the auditor to raise doubts from the review of the financial assistance. ‘Deal fever’ may be taking hold, and nobody will be anticipating that the company will fail in the immediate future.

This provides the recipe for corners to be cut and for issues to be missed or ignored. However, the reality in management buy-outs is that the company is typically very highly geared following completion and all sources of borrowings have been maximised. In short, the period immediately following completion is very risky for the company and care is required. Auditors beware!

Complications
Calculating the quantum of loss can be very difficult, particularly where there are other factors which may have contributed to the loss. The principle behind the calculations is that the claimant should be put in the same position as if the negligence had not occurred.

This simple principle can hide numerous complications. For example, assume that a company is struggling and receives negligent advice causing loss and, soon thereafter, the company fails as funds run out. The shareholders may claim that the company could have survived and prospered but for the negligent advice. They may try to claim compensation for loss of future profits and also the capital value of the company which has been lost.

Conversely, the defendants may argue that the company was making losses at the time and would have failed in any event. This can be difficult to resolve and will require careful analysis of the actions of the directors prior to the demise of the company, their plans to turn around the company and the timing and quantum of the direct losses occasioned by the negligent advice.

The loss claimed must flow directly from the breach of care. For example, if a tax-saving scheme is recommended negligently, and hence fails, then the tax losses can be recovered only if there was an appropriate scheme which should have been recommended by a reasonable tax adviser.

Professional negligence claims often arise from highly-charged and emotional circumstances.

The potential claimant may have suffered a substantial loss and be looking for someone to blame. Care is required when listening to the story told by potential claimants. They often gloss over their own mistakes and forget the caveats and warnings that may have been provided with the advice in question.

Put it in writing
In the current litigious climate, professionals are far better recording matters in writing and, wherever possible, limiting their liability through disclaimers and also by confirming, for instance, that particular advice or work is based on information provided by the client and has not been audited. Similarly, professionals may include liability caps in their engagement letters.

Unless the alleged negligence is clear cut, such as missed deadlines for tax elections, it is likely that the claim will be robustly defended, particularly if the sums involved are significant. In addition to the difficulties of proving negligence, a professional driven by pride will wish to clear himself from an allegation that he has performed below the standard expected of him.

Vital review
It is therefore vital that an independent review is obtained at an early stage of the potential claim and of the circumstances involved. If an accountancy issue is involved, then the forensic accountant should be able to advise on the allegedly negligent advice, the documentation which would be expected in the matter, and the level of work involved which would be expected in giving the advice.

This will need to be considered in the context of an engagement letter which should have been issued prior to the work being carried out by the defendant, and also any caveats or disclaimers issued with the advice in question.

In summary, it is right that claimants should be compensated where they have suffered loss as a result of negligent advice from professionals, but care is required in embarking on such cases which are likely to be protracted and expensive in all but the simplest of matters.