The English Court of Appeal found that the plaintiff building society had not proved damages against its auditors who gave them incorrect information about how to treat long-term interest rate swaps on its balance sheet under the IFRS requirements.
The swaps were not included on the balance sheet from 2005 till 2013, when they were swapped out, at a time when the swaps were ‘heavily out of the money’ (at a negative value due to the financial crisis at the time). They were broken at their fair value of £32.7 million plus transaction costs of nearly £300 000 for which the building society sued their auditors.
The court found that the auditors had not taken responsibility for the entire transaction. Although their accounting advice was admittedly negligent, the auditors’ responsibility did not extend to responsibility for the entire 50 year lifetime of the mortgage/swaps business.
The building society entered into the swaps for commercial reasons in respect of which no advice had been given by the auditors. The auditors gave accounting advice but were not involved in the decision to enter into the swaps.
What matters is not whether advice is given but the purpose and effect of the advice given. English law draws a distinction between giving advice and giving information.
This was found to be an information case where the plaintiff had to prove not only a loss but also that a loss would not have been suffered had the plaintiff continued to hold the swaps. The building society had not proved that it would not have incurred the loss had the information or advice given by the auditors been correct.
The court found it would be ‘a striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities’.
In South Africa, a causative link between the wrongful and negligent conduct and the loss is required.
The case is Manchester Building Society v Grant Thornton UK LLP.