The Court of Appeal applies SAAMCO principles to audit claims

The Court of Appeal applies SAAMCO principles to audit claims's Tags

Tags related to this article

The Court of Appeal applies SAAMCO principles to audit claims

Published 17 diciembre 2020


The Court of Appeal’s recent decision in AssetCo plc v Grant Thornton UK LLP [2020] EWCA Civ 1151, applied the SAAMCO principle to a claim in respect of a negligent audit. This article will focus on its implications for audit negligence claims.


AssetCo was a holding company with subsidiaries carrying on businesses related to fire and rescue services.The defendant auditor was sued for losses arising out of its audit of AssetCo’s 2009 and 2010 accounts. The 2009 and 2010 accounts presented AssetCo as being profitable, it later transpired that AssetCo was plainly insolvent.

Central to AssetCo’s claim was its allegation that the auditors’ failure to detect the fraudulent activities of senior management in AssetCo caused the fraudulent behaviours to continue, unchecked, and that in consequence large sums of money invested in the businesses were lost. The fraudulent activity included lying to, and deceiving, the auditors. AssetCo established in the counterfactual world that if the fraudulent activities had been uncovered, as it was accepted a competent audit would have done, AssetCo would have taken steps at an earlier stage to protect the solvency of its business and would have not incurred the claimed trading losses.

Grounds of appeal

The High Court’s decision was appealed on three grounds which can be broadly described as follows:

(i) Whether the losses for which it claimed damages were within the scope of the auditor’s duty of care and its breaches of duty were the legal cause of those losses. 

(ii) The judge in awarding “loss of chance” style damages, was wrong to award 100% of the claimed damages and not to discount the damages to reflect various uncertainties regarding events occurring in the counterfactual world; and

(iii) The judge failed to give credit for certain benefits received by AssetCo which resulted from it continuing to trade.


The Court of Appeal in part allowed, and in part dismissed the appeal, resulting in a reduction of the awarded damages. It is the bases on which the appeal was dismissed which are interesting for future audit negligence claims. 

The Court of Appeal found that AssetCo’s incurred losses were within the scope of the auditors’ duty of care and that SAAMCO principles could help determine those types of losses for which a negligent auditor was liable. The court concluded that it did not see any reason why the SAAMCO principle should not, in most circumstances, be applied to determine whether particular losses come within the scope of the auditor’s duty. The purpose of the SAAMCO’s principle is to distinguish the negligent audit that is merely the occasion for the loss from the negligent audit that gives rise to a liability to make good the loss. It is capable of being effectively applied to most types of loss that may be claimed in respect of a negligent audit.

The auditors here failed to detect the dishonest concealment of substantial losses in FY2009 and also the group’s insolvency, which continued in FY2010 and FY2011 resulting in the losses claimed by AssetCo. This failure deprived AssetCo (whether acting by its innocent shareholders or non-executive directors) of the opportunity to call the senior management to account and to ensure that errors in management were corrected.

AssetCo would have ceased incurring expenditure on its loss-making and unsustainable subsidiaries (which would have been revealed by a competent audit) and would have focused on the profitable elements of and opportunities for business.

On loss of chance, the court confirmed the judge’s finding that AssetCo could claim 100% of its damages claim.

It allowed the appeal that the defendant auditor should be given credit for certain matters which were the result of the company continuing its activities, reducing the final award of damages.


The loss of chance finding is unhelpful to defendants to professional indemnity claims. It is a sobering reminder of the risks of litigation. In this instance, it was held by the Court of Appeal that it was open to the judge to assess the certainty of events within the counterfactual world as 100% likely to happen. This is most unusual, you would expect a judge to take a more sceptical view of future events being certain, rather than merely likely, or possible. Defendant insurers can expect the decision to be relied on by Claimants seeking higher levels of damages in future loss of chance claims.

The most significant point arising for auditors is the Court’s confirmation that the SAAMCO principle can be applied to most audit negligence cases.

SAAMCO distinguishes between “advice” and “information” cases. If it is an advice case, the defendant has a duty to protect the claimant against the full range of risks associated with entering into the transaction. In an information case, the defendant supplied only a part of the material on which the claimant decided whether to enter into the transaction. In an information case, the defendant is “liable only for the financial consequences of [the information] being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater”. The defendant is not liable for consequences which would have occurred even if the information had been correct

Audit claims are “information” cases under SAAMCO, the ”information” being an unqualified audit report. It was found that AssetCo and its group were being run in a fundamentally dishonest way which had the audit report contained the correct information, would have stopped. The court found that where the continued, fraudulent and loss making operation of the business was only possible because management deceived the auditor into reporting the accounts as true and fair, the auditor was liable for the claimed investment and trading losses which would have been avoided in the Claimants counterfactual world.

The judgment cuts both ways for claimants and defendants to audit negligence claims. 

On the one hand, the decision may be used by Claimants to argue that investment and trading losses are recoverable from negligent auditors where they can prove certain management behaviours connected with those losses should have been stopped by a competent audit. 

On the other hand, SAAMCO is, correctly applied, a limiting factor on what losses can be claimed. There must be a causal link between the alleged negligence and the loss claimed. This is illustrated by the Court of Appeal declining to award the Claimant losses from the fraudulent CEO misappropriating funds for his personal benefit. The misappropriation did not arise from the “continuation of the loss making trading businesses on the strength of dishonest statements to the auditors.” There was “no effective causal link” between them and the negligent audit.

The application of SAAMCO remains a complex matter and its application will depend on the facts. As the Court observed, SAAMCO is “not a rigid rule of law” but rather is “simply a tool” for determining the loss flowing from negligently wrong information.


Richard Highley

Richard Highley

London - Walbrook

+44 (0)20 7894 6470

Benson Egwuonwu

Benson Egwuonwu

London - Walbrook

+44(0)20 7894 6213

< Back to articles