When a lender is considering advancing a loan to a company, it will need to decide whether it is comfortable with the potential borrower’s credit worthiness. As part of its financial due diligence, a lender is likely to review the borrower’s audited accounts, together with any other financial information available to it.
In addition to being part of a lender’s initial financial due diligence, the loan agreement will almost always contain provisions obliging the borrowing company to produce its audited accounts for the bank to review on an annual basis. Any financial covenants will then be tested by reference to those accounts (along with any other monthly or quarterly management accounts provided to the lender), and a breach of those covenants will be an event of default.
It would be easy to assume that a lender can rely on the accuracy of a company’s audit reports and, if negligently prepared (and as a result the lender suffers a loss), the lender can bring a claim against the relevant auditors.
Care must be taken by lenders though, as a recent case  highlights. The claimant bank had relied on non-statutory audit reports that were required to be delivered by the borrower under the loan agreement. The borrower engaged accountants to prepare the reports, which it then passed on to the bank. The bank claimed that the auditors had been negligent in the preparation of certain of the reports because they failed to uncover the fraud of two employees of the borrower, the result of which was that the financial covenants were met when, had the reports been correctly prepared, they would not have been.
The question for the Court revolved around whether the auditors owed the bank in question a duty of care in relation to the reports. Despite it being accepted that the auditors knew that the bank would rely on the accounts, the accounts were addressed to the borrower and not the bank, and included standard disclaimer wording where the auditors made it clear that they did not accept or assume responsibility to anyone other than the company. As the disclaimer was held to be clear and obvious, and was contained in the first two paragraphs of the two page report (the Court felt that any businessman or banker would be expected to have read the report in its entirety), the bank should have been aware of the disclaimer.
This case provides a useful reminder to lenders that, in order to rely on auditors’ reports, a direct contractual engagement of the auditors by the lender is the best approach, particularly in the context of any disclaimers in the reports.
For auditors, this is a helpful reminder that clear disclaimers should be included where reliance is not to be extended beyond the addressee – in the absence of a disclaimer in the above case, the Court held that it was clearly arguable that a duty of care would have existed.
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 Barclays Bank plc v Grant Thornton UK LLP  EWHC 320 Comm