In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for accountants.
Key Developments in 2021
In 2021 we saw the Supreme Court hand down its landmark judgment in the case of Manchester Building Society v Grant Thornton. The decision related to the scope of duty that professional advisers – in this case accountants and auditors – owe their client. The facts of the case are complicated and a full analysis of the case can be found here.
In very brief summary, Manchester Building Society (MBS) claimed that their accountants and auditors were responsible for losses that flowed from them having broken interest rates swaps as it claimed they flowed from the negligent advice given by the accountants to apply hedge accounting.
The Supreme Court unanimously allowed MBS's appeal with the majority holding that the correct approach was to identify the purpose to be served by the duty of care assumed by the defendant, and then to ask whether there is a sufficient nexus between the claimant’s loss and the purpose of that duty. In this case, the Court found that the damages claimed by MBS for the cost of closing the swaps were within the scope of the accountants' duty.
It is likely that claimants will use this judgment as justification for trying to recover a greater scope of losses than they perhaps would have done before. Professionals giving advice should, therefore, take note of the ‘purpose of duty’ question and should check their terms of engagement to ensure that they are absolutely clear on the agreed purpose of the advice being sought and provided.
What to look out for in 2022
Earlier this year the Government opened its consultation "Restoring trust in audit and corporate governance: proposals on reforms". The consultation, which closed in the summer, set out various proposals for widening the scope of the regulator's powers in an attempt to restore public trust in the way the UK's largest companies are run following the sudden collapses of major corporate entities such as BHS and Carillion. The consultation also follows on from the Competition and Market Authority's landmark report from 2019 that sought to break up the dominance of the Big Four in the UK's audit market.
It is intended that the proposed reforms will ensure that the UK's biggest companies are governed responsibly and transparently ahead of a new audit regulator, the Audit, Reporting and Governance Authority, being established which is expected in April 2023.
If adopted the proposals would permit the new regulator to analyse the entirety of a company's annual report and their accounts as opposed to being limited to scrutinising the strategic report only. The proposals also put forward the idea of the regulator assuming responsibility for making decisions around those who require prior approval to audit Public Interest Entities. Further, the new regulator would no longer be required to go through the courts to get an order to amend company reports, but rather it will have a power to make such orders of its own volition.
However, recent reports suggest that officials are expected to rein in some of the more controversial plans in favour of a more "business friendly" regime apparently in response to industry leaders warning that additional costs could push businesses outside of the UK.
There will be a phased implementation of any new proposals and we expect in 2022 to see more clarity around the outcome of the consultation, to include which proposals are likely to be adopted and the proposed implementation timeline.
Written by Carina McFadden
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