Trends in professional negligence

Investigations opened this year have also included some extremely high-profile cases. Most notably, in April 2025, the FRC announced its investigation into the auditors of Post Office Limited, adding to the fallout from the Horizon IT scandal, in which hundreds of postmasters were wrongfully convicted due to incorrect information provided by faulty IT systems. The Post Office scandal has garnered significant public attention in recent years, following its dramatisation on ITV. 

The investigation into the auditors of ISG, following their entry into administration in September 2023, also featured in the press with comparisons made to Carillion. While both Carillion and ISG were prominent in the construction industry, managing numerous government projects and experiencing significant redundancies after their collapses, it remains to be seen what factors contributed to the outcome in this case.

It is worth noting that the opening of any FRC investigation does not necessarily imply any wrongdoing by the auditors being investigated. The FRC’s threshold for opening investigations into auditors is relatively low. Matters are referred to the Conduct Committee simply where there is information which raises a question as to whether a Relevant Requirement, namely an International Standard on Auditing (ISA), has been breached. The ISAs are not prescriptive; instead, they take a principles-based approach, leaving a lot of room for interpretation. Hindsight being 20:20, in the wake of instances like ISG, Carillion or the Post Office, it’s easy for this hurdle to be crossed.

Therefore, while an ongoing FRC investigation can certainly make an audit firm nervous, it is not necessarily an indication that a professional negligence claim will be successful. Across the industry, we have seen a real trend of professional negligence claims made against auditors in circumstances where there has been a corporate failure, but claimants are unable to pursue claims directly against the Directors or the company, as the possibility of recovering any funds from these entities is too low. The auditors are therefore a much more viable route to recovery, thanks to their (compulsory) professional indemnity insurance, which ensures a payout to claimants who can establish a sufficiently strong case.

Establishing a case against the auditors is therefore an attractive and desirable proposition for potential claimants, but this can be quite tricky in practice. As in all negligence cases, claimants will need to establish a duty of care, breach of duty, and causation, as well as quantify their loss. The duty of care can be particularly challenging, thanks to the 1990 case of Caparo Industries v Dickman. In this case, the House of Lords ruled that the auditors did not owe a duty of care to the shareholders of the audited entity. They set out a three-part test to establish a duty of care as follows:

• Whether the damage was foreseeable.
• Whether there was sufficient proximity between the parties.
• Whether it would be ‘fair, just and reasonable’ to impose a duty.

Contemporaneous correspondence between the claimant and the audit firm can therefore be key in establishing whether a duty was owed.

A forensic review of the audit is then needed to establish whether the auditors breached said duty of care. The ISAs provide some guidance on this, but input from audit experts is needed to determine an opinion. Furthermore, while an ongoing regulatory investigation is helpful to the claimant’s case in that it applies significant pressure to the defendants, the threshold for opening such investigations is low and does not necessarily mean there was any wrongdoing by the auditors. Indeed, regulators regularly close investigations against audit firms with no findings or sanctions. Auditors are not required to uncover all fraud, nor can they predict the future. If an entity collapses due to events that happened following the audit and could not have been known to the auditors after having made reasonable enquiries, then there is no case.

Claimants will also face potential difficulties in establishing causation in such cases. For example, in a corporate collapse, a creditor will want to recover the money they are owed, which will go unpaid as the company cannot pay the debt. The auditors clearly would not have been able to prevent the company from collapsing, and so the debt would be unpaid either way. This course of action would therefore be unsuccessful. Instead, a claimant would have to demonstrate that if the auditors had warned them that there was a risk the company would collapse within the next 12 months in their audit opinion, they would not have continued supplies to the entity at all, and therefore the loss could have been avoided. Such cases are harder to prove and will generally require forensic evidence to establish. Forensics experts are then able to quantify any such loss.

Further, even in the event of a successful FRC case, this may not lead to any justice for those who have suffered because of any corporate wrongdoing. While there is a huge public outcry for the victims of the Post Office scandal to be compensated, the FRC is not able to provide this, even where financial sanctions are imposed. The FRC and ICAEW faced intense public criticism after sanctions were levied against the auditors of Silentnight. Although the £13 million fine was a record at the time, none of these funds were able to be put towards Silentnight’s huge pension fund deficits, leaving those who had dutifully paid in for years still out of pocket.

It is clear, therefore, that the regulator alone cannot be relied on to provide recourse for those who have lost out in corporate scandals and collapses. As cases against auditors continue to grow in popularity, we may see further developments.

The Crowe Forensic Team handles a substantial number of forensic cases, varying in size and complexity. We are always happy to have an initial, no-obligation discussion on any matters where we can add value and provide expert advice. For more information, please contact Alex Houston or your usual Crowe contact.