Accountant negligence during a business acquisition can cause substantial financial loss where poor due diligence, an incorrect valuation or defective financial analysis influences the price paid or the decision to complete the transaction.
A buyer may discover after completion that profits were overstated, liabilities were missed or the business was worth materially less than expected. This guide explains when those problems may give rise to an accountant negligence claim, what needs to be proved and how substantial transaction losses can be assessed.
Key Takeaways
- Accountants can owe duties when carrying out financial due diligence, business valuations and other acquisition work.
- A poor investment, unsuccessful acquisition or different valuation does not automatically mean an accountant was negligent.
- Claims can arise where material financial information that fell within the agreed scope of work was missed or incorrectly analysed.
- Buyers may have claims where competent advice would have led them to pay less, negotiate different terms or abandon the transaction.
- High-value claims often require expert accountancy or valuation evidence, supported by engagement letters, due diligence reports, accounts and transaction documents.
- Limitation should be considered early, particularly where an acquisition took place several years before the problem emerged.
“The involvement of accountants in Company transactions and valuations is a complex area but one where the scope for professional negligence may be considerable and where the consequential loss from accountancy error may be very substantial. It is essential to obtain prompt legal advice from specialists if you consider that the negligence of a transactional accountant has caused your business a loss. The sooner you seek such advice the better you will be equipped to advance a successful claim to recover your loss.” Tony Hill - Head of Professional Negligence & Commercial Litigation
When Can an Accountant Be Negligent in a Business Acquisition?
Accountant negligence can arise where an accountant falls below the standard reasonably expected of a competent professional when carrying out work connected with a business acquisition and that failure causes financial loss.
An accountant may be instructed to review historic accounts, investigate earnings, assess working capital, perform financial due diligence, value shares or a business, or advise on specific financial aspects of the transaction.
The precise scope of that work matters.
An accountant engaged to investigate defined financial issues is not automatically responsible for every commercial risk associated with an acquisition. The engagement letter, instructions and purpose of the advice can therefore be central to any subsequent claim.
It also matters who the accountant was working for. A report prepared for the seller, sometimes referred to as vendor due diligence, or for a lender may not create a duty to the buyer unless the buyer was given the right to rely on it, for example through a reliance letter.
This is particularly important in high-value transactions involving accountants, solicitors, corporate finance advisers and tax specialists, where responsibility may be divided between several professionals.
What Can Go Wrong With Business Acquisition Due Diligence?
Business acquisition due diligence is intended to help a buyer understand the financial position of the company it is considering purchasing. It is not a guarantee that the acquisition will succeed.
Problems may arise, however, where information that should reasonably have been identified within the agreed due diligence exercise is overlooked or incorrectly analysed.
Examples can include:
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- materially overstated revenue or profits;
- unusual or inappropriate accounting adjustments;
- understated debts or liabilities;
- deteriorating cash flow;
- unsustainable earnings;
- incorrect working capital figures;
- significant customer concentration;
- related-party transactions;
- inaccurate management accounts; or
- inconsistencies between reported results and underlying financial records.
Concerned accountant negligence affected a business acquisition?
Our professional negligence team can review the accountant's instructions, due diligence, valuation and transaction documents to assess whether you may have grounds for a claim.
In Infiniteland Ltd v Artisan Contracting Ltd [2005] EWCA Civ 758, a breach of warranty claim brought by a buyer against a seller, the Court of Appeal held that the seller’s warranties were qualified by matters disclosed through the disclosure letter, the disclosure bundle and the accompanying documents, including information made available to the buyer’s accountants. The court applied an objective test of what had been disclosed.
The case shows that a buyer’s own due diligence can weaken a warranty claim against the seller. If the buyer’s accountants were given information about a problem but failed to identify or report it, the buyer may be unable to recover from the seller. In that situation, a professional negligence claim against the accountant may become particularly important.
The key question in any claim against the accountant is therefore not simply whether a problem existed. It is whether a reasonably competent accountant carrying out the agreed work should have identified, investigated or reported it.
What If Due Diligence Caused You to Overpay for a Business?
Overpayment can be one of the most significant losses arising from negligent acquisition advice.
A buyer may discover after completion that the financial assumptions underlying the purchase price were materially wrong. For example, maintainable earnings may have been overstated or liabilities omitted.
If competent due diligence would have revealed the true position, the buyer may argue that it would have:
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- negotiated a lower purchase price;
- required an indemnity or additional warranty;
- changed the structure of the deal; or
- withdrawn from the acquisition altogether.
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This can become particularly important where the purchase price was calculated using a multiple of EBITDA or another earnings measure.
A relatively modest overstatement of maintainable earnings can have a much larger effect on the final valuation once a multiple is applied.
However, establishing loss is rarely as simple as subtracting one valuation from another. Evidence may be required to determine what the buyer would actually have done and what transaction would probably have resulted if competent advice had been provided.
When Can a Negligent Business Valuation Lead to a Claim?
Accountants are frequently instructed to value companies, businesses or individual shareholdings before a sale, acquisition or restructuring.
Valuation involves professional judgement. Different competent experts may legitimately reach different figures.
A valuation being different from the eventual sale price does not therefore establish accountant negligence.
A claim may arise where the valuation falls outside the range reasonably available to a competent professional because of matters such as:
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- inappropriate valuation methodology;
- unreliable financial information;
- incorrect earnings assumptions;
- unsuitable EBITDA adjustments;
- failure to account properly for debt or surplus cash;
- incorrect forecasts;
- overlooked liabilities;
- inappropriate valuation multiples; or
- failure to consider relevant information affecting the business.
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The purpose for which the valuation was commissioned is also important. If it was prepared specifically to guide the price of a transaction, reliance and the accountant’s scope of responsibility may be particularly significant.
What If the Seller’s Financial Information Was Misleading?
Discovering inaccurate accounts after an acquisition does not automatically mean the buyer’s accountant is responsible.
The seller, directors, accountants and other advisers may have different legal responsibilities.
Where information was deliberately concealed or misrepresented, claims involving contractual warranties, misrepresentation or fraud may need to be considered alongside any professional negligence claim. The terms of the sale and purchase agreement, including the disclosure letter, can affect whether a warranty claim against the seller is available.
The issue for the buyer’s accountant is different: were they instructed to investigate the relevant matter and should a reasonably competent due diligence exercise have identified or highlighted the problem?
This distinction can be important in substantial acquisition disputes where several potential defendants may have contributed to the loss.
How Do You Prove an Accountant Negligence Claim?
A successful accountant negligence claim generally requires evidence addressing four central issues:
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- Duty: Did the accountant owe you a duty, and what was its scope?
- Breach: Did the accountant’s work fall below the standard of a reasonably competent professional?
- Causation: What would probably have happened if competent advice had been given?
- Loss: What financial loss was actually caused by the failure?
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Causation can be particularly complex in acquisition claims.
It is not enough to identify a mistake and then attribute every subsequent business loss to the accountant.
The claimant may need to reconstruct the transaction that would probably have taken place without the negligent advice.
The Supreme Court’s decision in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, an audit negligence case, emphasises the importance of identifying the purpose of the professional’s duty when determining which losses fall within the professional’s responsibility. In that case, the damages were also reduced for the claimant’s contributory negligence, which shows that a buyer’s own conduct may be examined.
Relevant evidence may include engagement letters, due diligence reports, accounts, forecasts, valuations, board papers, financial models, correspondence and the sale and purchase agreement.
Independent accountancy or valuation evidence may also be required.
What Compensation Can Be Recovered?
Compensation generally aims to place the claimant in the financial position they would have occupied had competent professional advice been provided.
It does not automatically cover every loss suffered after an unsuccessful acquisition.
Potential losses can include:
| Potential loss | What may need to be established |
|---|---|
| Overpayment for the business | Competent advice would probably have resulted in a materially lower purchase price |
| Hidden liabilities | The liability should have been identified within the agreed due diligence scope |
| Defective business valuation | Negligent assumptions or methodology materially affected the transaction |
| Working capital shortfall | Incorrect calculations affected the completion payment or adjustment |
| Lost transaction value | Competent advice would have resulted in materially different deal terms |
| Remedial professional costs | Additional professional fees were reasonably incurred because of the negligence |
| Other consequential losses | The loss was caused by the breach and fell within the scope of the accountant’s responsibility |
In substantial claims, forensic accountants and valuation experts may be required to reconstruct the financial position that would probably have existed without the negligence.
Why the Accountant’s Engagement Letter Matters
The engagement letter is often one of the most important documents in an accountant negligence claim.
It can establish:
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- the services the accountant agreed to provide;
- the purpose of the work;
- areas excluded from the review;
- information the accountant was entitled to rely upon;
- who could rely upon the report; and
- contractual provisions dealing with liability.
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Liability caps and exclusion clauses are not always enforceable. Depending on the circumstances, they may be subject to a statutory reasonableness test, so they should be reviewed carefully rather than assumed to defeat a claim.
The distinction between comprehensive financial due diligence and a narrowly defined review can materially affect whether a claim succeeds.
This is why the professional’s instructions should be examined before assumptions are made about what the accountant should have discovered.
Time Limits for Accountant Negligence Claims
Strict limitation periods apply to professional negligence claims.
In England and Wales, contractual claims commonly require consideration of a six-year limitation period from breach. Claims in negligence also commonly involve a six-year primary period, although the date on which actionable damage was suffered can be important.
Where relevant damage was not reasonably discoverable at the outset, section 14A of the Limitation Act 1980 may provide an alternative three-year period from the required date of knowledge. Section 14A applies only to actions for negligence. It does not extend the limitation period for a claim brought purely for breach of contract, although it may help where the accountant also owed a duty of care in tort.
A statutory fifteen-year longstop under section 14B also applies to negligence actions. It runs from the date of the negligent act or omission and can bar a claim even if the claimant has not yet acquired the knowledge needed to start the section 14A period.
Acquisition disputes can create particular difficulties because the relevant financial damage may have occurred when the transaction completed, even though the buyer did not discover the problem until years later.
Do not assume time starts when the accountant admits an error or when the full extent of the loss becomes known. Obtain advice promptly where limitation may be an issue.
How Does an Accountant Negligence Claim Proceed?
The first step is normally to obtain and review the accountant’s file, engagement documentation, advice and relevant transaction records.
The alleged breach and financial consequences then need to be identified. Expert evidence may be required in higher-value cases concerning due diligence standards, valuation or loss.
Under the Professional Negligence Pre-Action Protocol, a claimant is encouraged to send a Preliminary Notice as soon as there is a reasonable chance of a claim. This briefly identifies the parties, outlines the complaint and, if possible, indicates the value of the claim. It should be acknowledged within 21 days.
Where there are grounds for a claim, a detailed Letter of Claim is then sent, explaining the facts, the alleged failures, causation and the losses claimed. The accountant should acknowledge it within 21 days and normally has three months from that acknowledgment to provide a Letter of Response and/or a Letter of Settlement.
The Protocol does not change the statutory time limits. Where limitation is close, the parties may agree a standstill agreement, or proceedings may be issued and a stay requested so that the Protocol steps can be completed.
The parties may then explore negotiation or mediation. Court proceedings may be necessary where liability or quantum cannot be resolved.
Did Accountant Negligence Cause a Significant Acquisition Loss?
Business acquisitions can involve substantial sums and complex financial evidence. A disappointing investment does not itself establish professional negligence, but serious failures in due diligence, valuation or transaction advice may justify investigation.
Wealth Recovery Solicitors can review the accountant’s instructions, the financial advice provided and the consequences of the transaction to assess whether you may have grounds for an accountant and tax adviser negligence claim.
If you choose to speak to our legal team, bring the engagement letter, due diligence report, valuation, accounts and transaction documents where available. Our team can explain the potential recovery routes, relevant deadlines and funding options.
FAQs
Can I sue my accountant for negligence?
You may be able to sue an accountant where they owed you a relevant duty, failed to exercise reasonable skill and care and that failure caused recoverable financial loss. A mistake or disappointing outcome alone is not enough.
Can I claim if negligent due diligence caused me to overpay for a business?
Potentially. You may need to prove that competent due diligence would have identified the financial problem and that you would probably have paid less, negotiated different terms or withdrawn from the transaction.
Can an accountant be liable for an incorrect business valuation?
Yes, but valuation involves professional judgement. A different valuation alone does not establish negligence. The methodology, assumptions, financial information and range of reasonable valuations may need expert examination.
What evidence is needed for an accountant negligence claim?
Important evidence can include the engagement letter, due diligence report, valuation, financial accounts, forecasts, emails, board papers, financial models and transaction documents. Expert evidence may also be required.
How long do I have to bring an accountant negligence claim?
Many claims involve a six-year primary limitation period, but the correct starting point depends on the legal cause of action and facts. In negligence claims, section 14A can provide an alternative three-year period from the date of knowledge, but this does not apply to purely contractual claims. A fifteen-year longstop, running from the date of the negligent act or omission, can bar a claim even before the problem is discovered. Obtain advice early rather than waiting for the final financial consequences to become clear.