New year, new partner … again

1st April 2016 marks the start of Tempest’s fourth year since Geoff, Caroline and Karen left Grant Thornton to set up the firm.  Two years ago April Fool’s Day saw Richard come on board as the firm’s fourth partner (a coincidence of course!).  This year the same date sees Ralph Chatfield grow the partner team to five.

We are thrilled to have Ralph join our ranks.  Having all worked with him previously at Grant Thornton we know first-hand the expertise and experience Ralph will bring to our team.

Ralph has specialised in forensic accountancy for over 20 years.  Like the other partners he has been involved in a wide range of cases over the years but he brings to Tempest a particular degree of expertise in a field the firm has not previously been able to offer its clients.

Ralph has prepared hundreds of reports assessing the causation and quantum of loss of earnings in respect of personal injury, clinical negligence and fatal accident dependency claims.  In addition, Ralph specialises in business interruption claims, including subrogated recoveries.

Welcome to Tempest Ralph!

A brief overview of quantum in Professional Negligence claims against auditors/accountants

In recent months we have been instructed to assist clients and their legal advisors with claims against auditors or accountants, following the identification of fraud or erroneous advice, or to assist with the defence of such claims.  In such cases we have been asked to comment on quantum.

In essence, in professional negligence cases, losses must arise as:

  1. a direct result of the negligence; and
  2. the losses must be foreseeable.

This means that, in general, there are two broad heads of claim being:

  1. Wasted costs – i.e. costs that have been incurred as a result of (caused by) the negligence that otherwise would not have been.
  2. Lost profit – i.e. where it can be demonstrated that profit has been lost (or losses made) as a result of the negligence.

The former head is often easier to quantify and evidence.  The latter can often be confused with either trading losses that would have occurred anyway (see Galoo) or, alternatively, might be viewed as the loss of a chance to improve the situation.  Accordingly, in this head it is more difficult to demonstrate causation, quantify and evidence.

Wasted costs

This category of cost typically includes the costs of investigating and rectifying the issue.  It may include any taxation over paid, assuming that it cannot be reclaimed, and/or the costs of dealing with the incorrect tax returns might be included.

Often claimants seek to include a claim for the audit fees paid to the alleged negligent auditor – on the basis of a failure of consideration.  However, if the company was subject to statutory audit, it would have had to incur audit fees in any event and consequently such a claim can be difficult to bring.

Loss of profit

The loss of profit calculation (or consequential loss) may be constructed using the counterfactual of what would have happened had the auditor/accountant not been negligent.  Such an approach assumes that the auditor/accountant would have notified the company of issues earlier than it actually did (or when the company identified the issues itself).  Accordingly, the key questions are:

  • When is it reasonable for the auditor/advisor to have been expected to notify the company of the issue(s)? This, or course, depends on the facts of each case.
  • What action(s) would the company have taken to resolve them, and when? There may be several scenarios to consider based on actions actually taken once the company became aware of the issue(s).

It may be that expected performance would have seen increased profitability; it may be that there would still have been some downturn in profits due to the general economic environment or other external market factors beyond a company’s control.  For example, in a recent case where we were advising an audit firm defending a professional negligence claim, we identified that the London 2012 Olympics had a significant impact on the claimant company’s tour bookings to both Europe and the rest of the world.  Our market research and review of competitor companies’ accounts confirmed substantial reductions in the sector’s turnover in the 2012/13 financial year which were attributed to London 2012.  Accordingly, we were able to demonstrate that the claimant company’s loss calculations were unreasonable and hence the claim put forward was overstated.

The gap between expected and actual performance may well drive losses into the future, until the actual performance post discovery matches the expected performance.  However it is imperative that assumptions that are made in projecting expected performance must be supported by as much evidence as possible to be robust.  The shaded area in the diagram below shows the “theoretical” losses in such cases (click on diagram to enlarge):

New loss graph

A further factor to consider is whether the losses claimed were foreseeable.  For example, in a recent matter a company issued proceedings against its accountant (which had carried out limited due diligence) following the purchase of a business which did not perform as well had been forecast.  Initially a warranty claim was brought against the vendor but the vendor went into administration.  The claimant subsequently issued a claim against its advisor for not performing adequate due diligence.  The accountant’s advice took into account the existence of robust warranties provided by the vendor.  Could the accountant have foreseen that the vendor was going to enter into administration two years after the SPA and therefore not comply with its obligations under the warranties provided?

Contributory negligence

It must also be borne in mind that any quantum figure is likely to be reduced to take account of contributory negligence by the claimant.

Summary

The quantification of loss in such claims is not a straightforward exercise.  There are both legal challenges, such as causation and foreseeability, as well as quantification and evidential problems in terms of any quantification of consequential loss.  Much depends on the counterfactual put forward and the expected performance of the company in the years following the identification of the issue – this can be a speculative exercise.  Assumptions that are made to project expected performance must be supported by as much evidence as possible to be robust which requires the consideration of the micro- and macro-economic environment and the performance of competitors is often useful in this respect.

Should you or your client be making a claim against an accountant/auditor for negligence, or indeed be defending such a claim, we would be pleased to lend our experience and expertise, whether that be through a brief review of some core papers or a full financial analysis and expert witness report.

Please do not hesitate to contact Geoff Mesher or Karen de Klerk if you would like to discuss further.

 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2015. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

Tempest Forensic Accounting UK LLP is a limited liability partnership registered in England & Wales number OC 38284 whose registered office is at Nant-Yr-Arian, Llandefalle, Brecon LD3 0NS. A list of partners (all of whom are chartered accountants and registered with the Institute of Chartered Accountants England & Wales) can be inspected by visiting the “Who we are” section of this website.

Tempest Summer Party – 30th June 2015

Thank you to all those friends of Tempest who helped make our 2015 Summer Drinks Party such a fun evening.  On what was probably the hottest day of the year so far around 75 people joined Geoff, Caroline, Karen and Richard for drinks and canapés at Hotel du Vin in Bristol.

Judging by the bar bill at the end of the evening a good time was had by all!!  The evening’s entertainment was a close up magician who seemed worryingly successful at foxing some of Bristol’s brightest legal minds!

For those that were unable to join us, we hope to do something similar in the not too distant future – we look forward to seeing then.

IRHP mis-selling: ‘Consequential’ administration

Over recent months we have seen a number of cases of IRHP mis-selling where the victim, aka customer, has been forced into administration (sometimes liquidation), in the aftermath of the mis-selling.  Businesses particularly susceptible to this include hotels and manufacturing companies for whom the rise in IRHP payments, following the 2008/2009 interest rate crash, coincided with a reduction in trading activity as a result of the onset of recession.

Businesses which were previously trading profitably and looking to grow through acquisition or capital investment, hence obtaining new loans and the associated interest rates swaps and collars, have found themselves struggling to make ends meet in the face of onerous debt servicing costs and preventative break costs.

Reductions in the market value of property assets has reduced loan to value security and worsening profit to debt servicing cost ratios (due in part to the IRHP payments themselves) have caused some businesses to breach borrowing covenants.  In some instances this was despite remaining profitable and meeting all debt servicing payments.

With the backdrop of the banks’ desire to reduce their exposure during the recession, breaches of covenants were often used as the mechanism to call in the debts.  Perhaps previously a degree of pragmatism may have prevailed, allowing the business to trade on so long as repayments continued to be made.  In our experience, businesses who have met all debt repayments and charges have still been forced into administration.

We have seen examples of both ‘sophisticated’ and ‘non-sophisticated’ customers being forced into administration and/or liquidation, effectively losing the entire business.

Potentially, therefore, the financial losses are very large.  However, in order to claim such losses as ‘consequential’ to the mis-selling of the IRHP, the claimant faces some major challenges.  Broadly it is necessary to demonstrate the following:

  1. The IRHP was actually mis-sold.
  2. The IRHP payments caused (or at least contributed to) the financial difficulties of the company.
  3. Were it not for the IRHP payments, the business would not have been forced into administration, for example, it would not have defaulted on its debt repayments or it would not have breached its loan covenants.
  4. The administration/liquidation resulted in a loss.

Depending on the circumstances, some of the above issues might be relatively straightforward.  For customers in the redress review process, mis-selling may have been admitted.  Also, administration or liquidation will almost inevitably have resulted in a loss to the company.

The biggest challenge often relates to the causation of the administration i.e. if and how the mis-selling caused the company to enter administration and whether that would have occurred in any event.  Where demonstrable we have then continued to estimate the quantum of consequential losses.

Should you or your client have suffered mis-sold IRHP and are considering if and how to seek reasonable compensation for the consequential losses, we would be pleased to assist, whether that be a brief review of some core papers or a full financial analysis and expert witness report.  Please do not hesitate to contact Geoff Mesher or Richard Frost if you would like to discuss further.

Expert Determinations and Transaction Disputes – Get the Right Expert and Advice

It is well known by acquisition professionals and corporate lawyers that it is common practice to include a dispute resolution clause requiring an expert determination in sale and purchase agreements where completion accounts or earn-outs are present.  What is less well appreciated is that getting the process right:  finding the right expert and the right adviser is vital.  Getting it right (or wrong) can have a significant effect on value.

Engaging an expert to determine an earn-out or completion accounts dispute who is unfamiliar with the process and the rules associated with such a role can be costly in terms of arriving at a perverse result – especially when expert determinations are notoriously difficult to overturn.

Likewise, engaging in such a process relying on advice from those who have not acted in the role of expert determiner is rather like driving blind-folded – unadvisable to say the least.

We have experience in acting as independent expert determiner in transaction disputes.  From disputes involving tens of thousands of pounds to those involving hundreds of disputed items and multi-million pound differences, Geoff Mesher, Managing Partner at Tempest, has determined many major disputes.

Geoff’s experience at KPMG and Grant Thornton over almost 20 years, as well as that of his fellow partners, means that we are able to bring a wealth of knowledge to assist clients who are facing what is often a unique and non-core experience for them.  Building on his experience as the determining expert, Geoff has also advised clients on the process and strategy of expert determinations and has drafted or reviewed submissions to experts on behalf of clients.

New partner, new home, new website …

Following the addition of our fourth partner earlier this year we have recently moved into larger office space in the heart of Bristol.  The new office will provide the facilities and capacity for growth over the coming years, maximising our service; whilst its location makes us easily accessible by road or rail.

We are also thrilled to be launching this, our new website, providing a snapshot of the diverse range of experience and services we can offer our clients.  We hope you find it both helpful and interesting; if you have any questions please do not hesitate to give us a call.  You will speak directly to one of the partners!