Court allows buyers to bring claim against target company’s accountants in relation to completion accounts
The High Court has dismissed an application for summary judgment and allowed the buyers of a company to bring a claim against a company’s statutory auditor in the context of a completion accounts mechanism.
Amathus Drinks plc v EAGK LLP  EWHC 2312 (Ch) concerned the acquisition of shares in a company.
The buyers had engaged a firm of accountants to conduct financial due diligence on the target company.
Following completion, the target company instructed the same firm of accountants to prepare its statutory accounts and, based on those statutory accounts, to prepare completion accounts under the share purchase agreement.
The accountants included a standard disclaimer – a so-called “Bannerman clause” in their engagement letter and their report, stating that they accepted no responsibility for their work to anyone other than the target company.
The buyers later alleged that, when preparing the statutory accounts, the accountants had failed to identify several frauds that rendered those accounts and, consequently, the completion accounts wrong. As a result, the buyers overpaid for the target company by a six-figure sum.
The buyers alleged that, notwithstanding the disclaimer, the accountants had assumed a duty of care towards the buyers and had negligently breached that duty.
The court agreed that the buyers had a realistic prospect of succeeding in their claim and allowed the claim to proceed to a full trail.
The Financial Reporting Council (FRC) has published its annual review of corporate reporting, examining the 2022/2023 reporting season.
Key points arising from the review include the following:
- companies should explain key inputs and assumptions applied to asset impairment testing. It advises companies to ensure that impairment testing complies with IFRS, and it encourages additional disclosures where headroom is low;
- companies should describe all significant judgments made and not simply list the matters requiring judgment. Disclosures should be reassessed every year to capture all relevant matters;
- the company’s strategic report should provide a fair, balanced and comprehensive review of the company’s development, position, performance and future prospects. This should include an unbiased discussion of both positive and negative aspects of performance;
- companies should ensure all dividend requirements are met, including filing interim accounts with Companies House if these have been used to justify a dividend; and
- the accounts should disclose company-specific information on material accounting policies and transactions and explain how these apply to the company’s particular circumstances.
The review also makes specific recommendations in relation to financial instruments, income tax, revenue, provisions and contingencies, and fair value measurement.
The FRC has also confirmed that, in 2023/2024, it will be conducting thematic reviews on fair value measurement and disclosure against the Recommendations of the Taskforce on Climate-related Financial Disclosures (the TCFD Recommendations).
It will also be continuing its ongoing reviews of reporting by very large companies and compliance with new IFRS 17 (insurance contracts).