The Financial Reporting Council ("FRC") has in recent times announced a number of investigations into the conduct of auditors, arising out of the collapse of well known companies such as Carillion, Thomas Cook, and Patisserie Valerie.
The FRC's investigations are usually conducted by its Enforcement Division under the FRC's Audit Enforcement Procedure, and are of course independent from any action the companies (or their liquidators) may bring against the auditors for damages for the losses suffered as a result of the negligent conduct of audits.
However, the FRC's findings – when published – are for obvious reasons likely to cover much of the same ground which would be the subject matter of a civil action, and can usefully be deployed by the Claimant in its attempt to win damages from the auditor in its civil claim.
At a minimum the fact of the FRC investigation, its findings and any sanctions it imposes can be introduced in the civil suit as a relevant part of the factual matrix. It is sometimes the case also that a Claimant's pleading can be bolstered or supplemented by reference to the allegations upheld by the FRC.
In AssetCo PLC v Grant Thornton UK LLP  EWHC 150 (Comm) reference to both the findings and sanctions imposed by the FRC were prayed in aid by the successful Claimant, and the agreed Particulars of Fact and Acts of Misconduct by which Grant Thornton compromised the FRC investigations was set out in full in the judgment (paragraph 1117).
The issue, however, for the Claimant is often one of timing. The FRC's investigations are rarely concluded before a party wishes to commence a civil action against its auditors, and a Claimant must usually therefore assess the merits of such a claim without the benefit of the FRC's findings.
The Claimant's position will usually be further complicated by the fact that it will not know what audit work was in fact undertaken at the point when it wishes to bring proceedings. The fact that statutory financial statements were inaccurate and/or have been restated is not of itself sufficient to demonstrate that auditors have been negligent, and a company has no right under English law (other than in the course of the disclosure process in litigation) to compel its auditors to deliver up their files.
Against this background, parties may seek an order for pre-action disclosure of the audit files pursuant to CPR 31.16.
Carillion Plc v KPMG LLP & Anor  EWHC 1416 (Comm). ("Carillion")
Exactly such an application was made in the recent case of Carillion.
In that case, Carillion had formed a "settled intention" to bring proceedings against KPMG its auditors claiming hundreds of millions of pounds as a result of KPMG's alleged failure to detect that its financial statements did not reflect their true position.
Carillion claimed that the application was necessary because KPMG refused to provide its working papers voluntarily notwithstanding requests dating back to 1 October 2019, and argued that that these documents would be essential in any future case, to proper pre-action consideration, and pleading of a claim against KPMG.
KPMG resisted the application. It contended that Carillion had failed to meet the various jurisdictional thresholds in CPR 31.16 and that in any event discretionary considerations favoured dismissing the application.
Jacobs J dismissed the application.
He adopted the summary of the relevant legal principles provided by Blair J in paragraph 17 of his judgment on Assetco's unsuccessful application for pre-action disclosure – AssetCo PLC v Grant Thornton UK LLP  EWHC 1215- and held "with some hesitation" that the jurisdictional threshold had been met.
He declined though to exercise his discretion in favour of ordering pre-action disclosure on the following main grounds:
- Carillion could satisfactorily plead its case;
- Carillion's own documents should enable it to say why, on the material available to KPMG, KPMG acted negligently;
- The level of assurance and certainty which Carillion was seeking to achieve by virtue of the application was inappropriate and did not justify the application being made;
- The task of reviewing c 6,000 documents to provide the pre-action disclosure sought was unduly burdensome (notwithstanding that the costs would ordinarily be borne by the applicant);
- This was a case which would develop further, and amendments to the pleadings would be inevitable, even if the disclosure were to be ordered;
- KPMG had not failed to act in accordance with the Pre-Action Protocol.
This case demonstrates that in the absence of exceptional circumstances, the Court will be unwilling to exercise its discretion to grant an order for pre-action disclosure in commercial cases. Indeed, the authorities to which Jacobs J was referred in Carillion contained no recent examples of successful applications for pre-action disclosure, and Jacobs J cited with approval the statement by Blair J in AssetCo that in a commercial context, a pre-action disclosure order is, if not exceptional, unusual.
The approach of Jacobs J recognises that claimants in such cases must work with the material available to them at the outset to formulate the claim, recognising that almost inevitably amendments will be necessary as the case progresses.
Mark Davis acted for AssetCo in the cases referred to in this article.