When is an accountant liable for a professional error?

Introduction

When a company fails shortly after an accountant has issued an unqualified opinion on the financial statements, almost invariably the same question arises: should the accountant have seen this coming, and is the accountant liable for the loss of those who relied on the figures? The life insurer Vie d'Or provided the leading example. The accountants issued unqualified opinions on the financial statements while the insurer's solvency fell short. When the company failed, the aggrieved policyholders sued the accountants in tort. In its judgment of 13 October 2006 the Supreme Court formulated the standard that has governed this area of law ever since.

The decisions analysed below follow the same recurring pattern. A buyer, an investor or a policyholder relies on figures audited or compiled by an accountant, reality proves otherwise, and the injured party seeks recourse against the accountant. The case law shows that the path from breach of a standard to actual liability consists of several independent steps. A disciplinary complaint is not the same as civil liability, an error is not yet a loss, and even an established error may fall away entirely through the injured party's own contributory fault. This contribution discusses those steps by reference to three Supreme Court judgments and four decisions of the lower courts, each of which returns to the underlying standard set out in Vie d'Or.

The standard: the reasonably competent and reasonably acting accountant

The starting point is the care that may be expected of a reasonably competent and reasonably acting accountant. As a professional, the accountant is required under Section 7:401 DCC to exercise the care of a diligent contracting party towards the client. In the case law that standard is given content by the requirement that the accountant act as befits a reasonably competent and reasonably acting fellow professional. A breach of that duty of care may qualify, towards the client, as an attributable failure in performance, and, towards third parties, as a tort. The Arnhem-Leeuwarden Court of Appeal summarised this starting point concisely in the charcoal case concerning Eko Blok and Carbo, with reference to Vie d'Or and the later Supreme Court judgments.

The content of the standard is not abstract, but is determined by the professional rules applicable to the accountant. In the case between COFCO and Ernst & Young concerning the acquisition of the Nidera group, the Rotterdam District Court elaborated on this: the duty of care is given content by Dutch legislation, regulation and conduct standards for accountants, including the Further Regulations on Audit and Other Standards. This explains why the assessment is always concrete. In the Nidera case the question was whether the audit of the mark-to-market valuation had been designed and carried out with sufficient depth. In the acquisition of the construction company BTO the question was whether the auditor should have checked the list of work in progress. On both occasions the conclusion was that the accountant had not done what a reasonably competent and reasonably acting fellow professional ought to have done in the given circumstances.

According to Vie d'Or, that assessment turns on an appraisal of all the circumstances of the case. The factors to be weighed include the nature of the standard breached and the seriousness of the breach, the measures the accountant did take or the information the accountant did provide, and the extent to which the risk of loss was reasonably foreseeable to the accountant. Relevant in that regard is whether the control measures were taken and the warnings given that could reasonably be required of the accountant in the given circumstances to avert that risk. In the AquaServa case the Amsterdam District Court expressly applied these considerations, with reference to the same passages from Vie d'Or.

The special capacity of the accountant

A recurring element is that the accountant acts in a special capacity: that of a professional subject to disciplinary regulation. In the AquaServa case that played an independent role. There the chartered accountant acted not only as accountant, but also as director of the accountancy firm. According to the Amsterdam District Court, that did not detract from the fact that a personal duty rested on him, in view of his capacity as accountant, to conduct himself as a reasonably acting and reasonably competent accountant and to exercise the necessary care. The special capacity therefore entails a duty of care resting personally on the professional, which may exist alongside the liability of the firm.

From that public function it also follows that the circle of protected interests may be wider than the client alone. The Amsterdam District Court assessed the claims against the accountant by reference to the question of what could be required of him, in view of the interests of those whose interests were affected sufficiently directly by his conduct, in the careful performance of his task. Who belongs to that circle then depends heavily on the nature of the task the accountant was performing. A large part of this area of law rests on that distinction between statutory and non-statutory tasks.

Statutory tasks and the duty of care towards society

In the performance of a statutory task, such as the statutorily prescribed audit of the financial statements, the duty of care reaches furthest. According to Vie d'Or, the interests involved in the proper performance of the external auditor's task are not confined to those of the legal entity whose financial statements are concerned. In society, third parties may expect that the information disclosed through publication of the financial statements and an unqualified opinion gives, in the independent and objective judgment of the accountant, a true and fair view of the assets, results, solvency and liquidity of the company. Third parties too must be able to attune their conduct to that information and to rely, in their financial decisions, on the presented view not being misleading. In this way, the performance of that task also serves a substantial public interest, and the accountant may in certain circumstances be liable towards third parties as well.

High demands are therefore placed on the care of the auditor. The Arnhem-Leeuwarden Court of Appeal expressed this in the charcoal case: where the audit of the financial statements under Section 2:393 DCC concerns a statutory task, the buyer was entitled to attune his conduct and decisions to the information in the financial statements approved by the accountant. In that case it was established that the valuation of a number of risk-bearing loans had been insufficiently critically audited, so that a true and fair view on that point was insufficiently present. Because it was foreseeable to the accountant that third parties might rely on the accuracy of the presented view in financial decisions, the court held that there had been careless conduct towards those third parties. That did not yet establish liability, the court emphasised, because that also requires a causal link with the loss.

The Nidera case shows how this special duty of care also applies in an international audit chain. Ernst & Young Netherlands was, as group auditor, responsible for the statutory audit of the consolidated financial statements of the Nidera group, while Ernst & Young Brazil, as component auditor, audited the reports of the Brazilian subsidiary. The Rotterdam District Court held that a special duty of care towards the buyer rested on both. They knew, or ought to have understood, that the consolidated financial statements could be relevant to a possible share transaction and that a buyer might rely on them. The circumstance that the Brazilian company was not subject to Dutch regulation did not detract from this, since Dutch law applied to the claim.

Non-statutory tasks and the duty of care towards the client

For non-statutory tasks, such as compiling figures or advising, a different starting point applies. There the accountant in principle owes a duty of care only towards the client. In the case concerning the acquisition of a marina business, in which the accountant had compiled the financial statements and half-year figures, the Supreme Court clarified on 29 January 2021 when that duty of care nevertheless extends to a third party. That is the case where the accountant, at the latest at the moment of releasing the report, knows or ought to know that it will come into the hands of a third party and that this third party is likely to rely on the report in a decision about a particular transaction or a transaction of a particular kind.

According to that judgment, the question whether, in the case of a non-statutory task, there has been careless conduct towards a third party must be answered by reference to the circumstances of the case, having regard also to the accountant's function in society. In doing so, the Supreme Court introduced an important limitation. A duty of care towards a particular third party does not without more entail that the accountant has an equal duty of care towards other third parties. In the marina case the first buyers had already proceeded with their investment before the figures became available, whereas subsequent buyers came into the picture only a quarter later. As regards those later buyers, the accountant did not, on releasing the figures, have to take into account that they would let their conduct be determined in part by those figures. To that extent the claim failed.

The Arnhem-Leeuwarden Court of Appeal built on this distinction in the charcoal case. The approved financial statements for earlier financial years concerned a statutory task on which the buyer was entitled to rely, but the draft figures for the current financial year had not yet been given an unqualified opinion and had not yet been made public. Those draft figures had moreover been prepared before the buyer came into the picture, and thus not for the purpose of providing him with information. For any errors in them the accountant could therefore not without more be successfully held liable. The distinction between what the accountant releases in a statutory capacity and what circulates as provisional, internal or non-public material is thus decisive for the scope of his responsibility towards third parties.

The disciplinary ruling and the enhanced duty to give reasons

Many civil proceedings against accountants follow a disciplinary complaint before the Accountants Disciplinary Tribunal. A well-founded disciplinary complaint carries weight, but is not decisive. From the disciplinary court's ruling that there has been conduct in breach of the standards applicable to the profession, it cannot without more be concluded that the person concerned is civilly liable for breach of a duty of care. Vie d'Or explained this from the very nature of disciplinary law: its primary purpose is, in the general interest, to promote proper professional practice, and it assesses whether a professional has acted in accordance with the professional standards by different criteria and without the civil rules of evidence.

The Supreme Court sharpened this relationship in the flower-import case of 22 September 2017. Where the civil court departs from the ruling of the disciplinary court, it must give reasons for its ruling in such a way that it is, also in the light of the disciplinary court's assessment, sufficiently comprehensible. In that case the Accountants Disciplinary Tribunal had imposed a warning on the chartered accountant because he had taken an insufficiently critical stance towards an intermediary who presented himself as a financier. The court of appeal had rejected liability, but did so, according to the Supreme Court, on grounds that were, in the light of the disciplinary ruling, not comprehensible without further reasons. The judgment was set aside and the case referred back.

The reverse situation arose in the cases concerning BTO and AquaServa, in which the lower court instead aligned itself with the disciplinary ruling. In the BTO acquisition the 's-Hertogenbosch Court of Appeal held at the outset that a disciplinary breach of a standard does not automatically constitute a civil professional error, but then confirmed that the failure to check the manipulated list of work in progress was also careless by civil-law standards. In the AquaServa case the Amsterdam District Court assessed the matter independently and concluded that a disclaimer of opinion was insufficient and that an adverse opinion had been called for. In these decisions the disciplinary ruling functions as a consideration of weight, not as an automatism.

Disciplinary law also plays a role in limitation. In the BTO acquisition the 's-Hertogenbosch Court of Appeal held that the limitation period did not already begin to run when the buyer became aware of the fraud. It began to run only after he had, through knowledge of the disciplinary decisions, become aware of the accountant's actual acts and omissions as the person liable for them. As long as the injured party was entitled to rely on the accountant's expertise, he had insufficient certainty that the loss had been caused by the accountant's erroneous conduct.

Causal link: a breach of a standard is not yet liability

Even an established professional error gives rise to an obligation to compensate only if there is a causal link between that error and the alleged loss. That link exists where the injured party, disregarding the breach of the standard, would have taken a different decision. The charcoal case illustrates how independent this hurdle is. The Arnhem-Leeuwarden Court of Appeal accepted that the valuation of the foreign loans had been insufficiently audited and that there had thus been careless conduct towards the buyer, but nevertheless rejected the claim. The buyer's submissions did not show that those loans were of decisive significance for the purchase decision. The foreign activities did not form the core of the business plan, and the buyer had not even asked about the value of those loans at the time of purchase. On that state of affairs the required causal link was lacking.

The duty to warn from the flower-import case shows the causation question from a different angle. Whether the loss can be attributed to the accountant depends, according to the Supreme Court, in particular on whether the accountant could, in the concrete circumstances, be expected to warn the client about the conduct of a third party, and what the consequences of that warning would probably have been. The court of appeal had established nothing on that point, although the submissions gave cause to do so, and that shortcoming contributed independently to the setting aside.

Against these cases stands the BTO acquisition, in which the causal link was instead accepted. The 's-Hertogenbosch Court of Appeal considered it sufficiently established that the approved 2010 financial statements had been relevant to the acquisition decision and that the buyer was entitled to attach value and authority to them, in part because the figures had been approved by the auditor. The correct figures would have shown a substantial loss, and with that knowledge the company would not have been acquired. In the Nidera case it was sufficient, for referral to the damages-assessment proceedings, that the possibility of loss was plausible, and the Rotterdam District Court held that the buyer had, in his investment decision, relied in part on the approved consolidated financial statements and was reasonably entitled to do so.

Contributory fault and the duty of inquiry of the professional party

Where a causal link is accepted, the obligation to compensate may still be reduced or fall away entirely through the injured party's contributory fault under Section 6:101 DCC. The loss is then apportioned between the injured party and the liable party according to the extent to which the circumstances attributable to each contributed to it. In the charcoal case this led to a striking conclusion. The Arnhem-Leeuwarden Court of Appeal held that, even if the causal link were accepted, the accountants' obligation to compensate would fall away entirely. The buyers were professional parties with commercial expertise and business experience, on whom, in the purchase of shares, a duty of inquiry rested into the essential characteristics of the business. They had taken their decision hastily and on the basis of little inquiry, had disregarded an available due diligence report and had ignored several warning signals. Fairness then entailed that any obligation to compensate fell away entirely.

That a plea of contributory fault does not always succeed is apparent from the BTO acquisition and the AquaServa case. The 's-Hertogenbosch Court of Appeal rejected the defence in so far as it amounted to the buyer having had to look more closely into the financial situation, because the buyer was precisely entitled to rely on the approved financial statements. It does not lie in the accountant's mouth to reproach the buyer for not having redone the audit of the approved figures. In the AquaServa case the Amsterdam District Court considered, in similar terms, that the defence that the injured party should himself have conducted an inquiry does not remove the unlawfulness and can at most play a role in the extent of the loss. The outcome here depends heavily on the capacity of the injured party and on whether he was reasonably entitled to rely on the accountant's work or was himself required to make further inquiry.

What does this mean for the accountant, the client and the injured third party?

For the accountant, the case law analysed underlines that the scope of his responsibility is determined by the nature of his task. In a statutory audit and a publicly disclosed unqualified opinion, the duty of care reaches into society, and high demands are placed on the audit. In non-statutory work, the duty of care in principle remains confined to the client, and a duty of care towards a third party arises only where the accountant knows or ought to know that the third party will rely on the report for a transaction. A disciplinary warning or reprimand is a serious signal, but is not equivalent to civil liability. Whoever documents his audit work and warnings carefully stands stronger in civil proceedings.

For the client, the accountant is bound towards him to the care of a diligent contracting party. At the same time the decisions show that the client retains his own responsibilities: the management is responsible for proper administration and for providing complete information. In the charcoal case and the BTO acquisition it was precisely the concealment or manipulation of data by the company itself that was a reason why certain reproaches against the accountant failed. Complete and timely provision of information to the accountant is therefore not only an obligation, but also a condition for later being able to invoke the accountant's errors successfully.

For the injured third party who relied on the figures, a multi-step test emerges. Liability requires, successively, a breach of a duty of care, a duty of care that also extends to this third party, a causal link between the error and a changed decision, loss, and an apportionment for contributory fault. A professional buyer who was entitled to rely on a publicly disclosed, statutorily audited and approved set of financial statements stands stronger than a buyer who used provisional or non-public figures, who ignored available inquiry, or who had already taken his decision before the figures became available. Each of these steps may in a concrete case be decisive, as the decisions analysed confirm in various ways.

Cited case law

Supreme Court

• ECLI:NL:HR:2006:AW2080 (Supreme Court 13 October 2006, Vie d'Or)
• ECLI:NL:HR:2017:2452 (Supreme Court 22 September 2017)
• ECLI:NL:HR:2021:149 (Supreme Court 29 January 2021)

Courts of appeal and district courts

• ECLI:NL:RBAMS:2016:145 (Amsterdam District Court 13 January 2016)
• ECLI:NL:GHSHE:2022:1544 ('s-Hertogenbosch Court of Appeal 17 May 2022)
• ECLI:NL:GHARL:2023:4512 (Arnhem-Leeuwarden Court of Appeal 30 May 2023)
• ECLI:NL:RBROT:2024:10834 (Rotterdam District Court 30 October 2024)

Juriaan de Vries is a lawyer at Prime Law, specialising in corporate and commercial litigation. See the disclaimer.

See also

• Professional liability: the standard and the defence
• Professional liability of a tax adviser: USD 17 million and the substantial presence test