The use of experts in professional negligence cases

A case study

One case in which we were instructed involved the matter of a local law practice. Over the course of 12 years, the senior partner in that practice diverted at least four million pounds (and maybe as much as ten million pounds) from client accounts to fund a lavish lifestyle, many of those clients being charities and estates in probate.

Such was the trust invested in this partner that their criminal behaviour went undetected for many years as they were allowed to process fake journal entries to ‘balance the books’ via an effective process of teeming and lading various client account ledgers; after the fraud was uncovered, the law firm was shut down by the Solicitors Regulation Authority (SRA) and the partner subsequently struck off – a claim was then brought by various charities (former clients of the practice) against the firm, its remaining partners, and the insurers of the practice. In turn, the practice took action against their auditors – it was the role of the auditors, in conducting their annual audits, that was the focus of our work. 

When assessing whether the work of a professional has been negligent, the question asked is: “Would a competent accountant, acting reasonably, have carried out the same or similar work, and reached those same conclusions?”. At the heart of this case was the key question of whether the fraud could, or should, have been unmasked at a much earlier stage than it had been (as it happens, the crime was revealed purely by chance by another partner, and not from any audit procedures).

As we were required to assess the historic work of an auditor, one of our audit partners with significant experience in auditing law firms (in their capacity as a responsible individual (RI)) led the technical aspect of the case. A challenge in this case was access to information, as at the time the SRA intervened on the practice all files were confiscated and certain client files were not immediately available for inspection. Another challenge was that we needed to assess the audit work based on the auditing rules that were in place across the various relevant historical accounting periods.

There were three main areas that the claim focused upon in its highlighting of the alleged inadequacies of the auditors’ work.

1. The auditors’ assessed level of risk and the impact that had on sample size selection and focus.
2. The auditors’ execution of the testing with an alleged lack of professional scepticism and rigour in respect of obtaining supporting documentation.
3. The auditors’ assessment, advice and communication to the practice’s partners and the SRA in respect of the practice’s systems and controls.

Risk assessment is a subjective matter for the reporting accountant to conclude upon based on the knowledge they have of the business, and this tends to be based on the inherent risk of an audit and the risk associated with that business’s particular accounting system. The key risks that were noted in this matter were the significant influence/potential override of the partners in the business and the large number of estate/probate cases. 

An underlying principle of any core audit is the need to obtain sufficient, appropriate audit evidence and to assess the relevance and reliability of information presented. An overriding principle when assessing evidence gathered is its reliability – a useful approach being to rate evidence from weakest to best, the former may be represented by say internal file notes, while the latter might be confirmation of a receipt, or transaction, by an independent third party. A common feature, both on this case, and other matters we have worked on, is whether the professional scepticism demonstrated by the party accused of being negligent was sufficient to assess the adequacy of their work, and this applies across a number of professional disciplines. 

Part of the role of the forensic team was to highlight that there were issues for the law practice to address which were as pertinent as any accusations of negligence on the part of the auditors – the other partners implicitly trusted the rogue partner; this partner was not challenged in their access to the practice’s ledgers, this was an established partner who was well regarded within the community; and why should any suspicion necessarily fall upon them either from the practice, or the auditors?

Ultimately, it was our judgment call as to whether the auditors in this case had undertaken sufficient work that might have allowed them the opportunity to uncover the fraud, or whether their audit testing fell short of what we might have expected. It is important to note that whether instructed on behalf of either claimant or defendant your view as to the appropriateness of the work undertaken should not change, it should be independent, and uninfluenced by the party paying or instructing you.

This case, from our perspective, was focused on liability and the work of the auditors with minimal quantitative aspect, and was settled shortly after our advice on liability was produced – however, we have also worked on cases where we assess quantum based on findings in relation to liability from our specialist teams, or are instructed to assume that negligence has taken place and, if that should be found, what the implications are from a quantum perspective. This is centred on establishing the ‘what if’ scenario, and typically those profits that may have been earned but for the negligence complained of, taking place.