Professional Negligence Claims Against Accountants

Professional negligence (or simply, negligence) is an area of law that is designed to recover financial loss incurred by a client and third parties caused by professionals in some circumstances.

In addition to professional negligence, there are other types of claims that might be relevant against an accountant or auditor that may run instead of, or alongside, a claim for professional negligence. These other types of claims each have their advantages and disadvantages, and generally have several overlapping features.

Claims that may be brought against an accountant in addition to, or instead of, a claim of professional negligence include breach of contract, misleading or deceptive conduct, breach of statutory duty, breach of trust, breach of fiduciary duty and breach of a consumer guarantee. This is not an exhaustive list.

Gibbs Wright does not practice in personal injury law, and as such, references to professional negligence is the reference to non-medical professionals, for example, accountants and auditors.

The requirements to establish professional negligence against an accountant or auditor are:

• The accountant or auditor owes a duty of care to the plaintiff (typically the client or a third party – this is usually easy to establish)
• The accountant or auditor breached that duty of care (for example, by failing to exercise reasonable care and skill in the delivery of the services they provide to a client)
• The client or third party suffers loss (typically financial loss)
• The loss was caused due to the breach of duty of care by the accountant or auditor
• The loss was reasonably foreseeable (the test is that the loss was not ‘too remote’, but whether the loss was foreseeable is a convenient way to think about whether you can claim the loss) 

In order to maximise damages and minimise risk, experienced litigation lawyers will typically run multiple types of claims against an accountant or auditor at once. Each type of claim can have its own advantages and disadvantages.

For example, if your accountant or auditor engaged in misleading or deceptive conduct that caused loss, that claim will not require a client or third party to prove that the accountant or auditor failed to exercise reasonable care and skill. Instead, many misleading or deceptive conduct matters relate to future matters, which will require the client or third party to demonstrate that the accountant or auditor did not have reasonable grounds for making the representation. It may be possible to successfully establish both claims, in which case, the claim that will award the highest damages will be preferred.

An experienced litigation lawyer will be able to assess what causes of action are likely to apply to your case.

First, it is important to determine the scope of an accountant’s liability to a client or third party. This is usually determined by the retainer (i.e. the contract or agreement) in which the client and the accountant have entered into. The reason that a retainer is important is because it is relevant to what the accountant is supposed to be doing for the client.

If a retainer had a scope of work to lodge the company’s tax return, it may be difficult to say the accountant was negligent if they failed to uncover fraud or misappropriation of funds. On the other hand, if the scope of work was to audit the books of the company, a claim for negligence would be difficult on the basis the auditor failed to lodge BAS. The retainer is a key starting point to determine what the accountant or auditor were engaged to do, and how far their responsibilities go.

A retainer can be oral, written, or partly oral and partly written. Terms of a contract have become more fluid over time (particularly due to the Australian Consumer Law) giving more protections to clients.

Second, a question that is helpful to ask is what a reasonably prudent accountant or auditor would have done in all of the circumstances. If other reasonably prudent accountants or auditors would have acted the same way, a claim for professional negligence may not be made out.

A professional will not necessarily have acted negligently simply because they have made an error in judgment or made a mistake. However, if your accountant or auditor has caused you financial loss, you should contact Gibbs Wright to discuss your case with one of our professional negligence lawyers.

There are various documents and records that may need to be gathered such as any written correspondence between the client or the third party and the accountant. These types of documents can usually be obtained after providing an authority to release, and failing that, during disclosure, or pre-litigation disclosure, even if you’ve lost the documents or never had access to the document.

You will likely need to obtain evidence from an experienced accountant or auditor to give an opinion about whether other reasonably prudent accountants or auditors would have acted the same way as the client’s accountant or auditor.

The client or third party will also need to prove financial loss. This can sometimes be quite straightforward but may require a forensic accountant to provide an expert report about the sum of your damages, particularly when the financial loss may require an opinion about the sum of loss or when the financial loss is not straightforward.

The types and sums of damages you can claim depend on the circumstances of the case and the types of claims that you may be eligible to bring against your accountant or auditor. However, as a very general concept, most claims try to place the client or third party in the position they would have been if the wrongful act had not occurred. This might include:

•       Financial loss suffered directly because of your accountant or auditor
•       Financial loss suffered indirectly because of your accountant or auditor
•       A claim for the recovery or reduction of professional fees

There are some limits that might apply. This includes whether the loss you incurred was reasonably foreseeable. The loss must also be caused by the breach of duty by the accountant or auditor.

You may also be entitled to exemplary damages. This is an award to punish the accountant or auditor.

You may also be entitled to seek specific performance so that your accountant or auditor must do (or refrain from doing) a certain action.

Some claims against accountants may be limited to $2 million due to limitation of liability legislation. 

Most professional negligence matters are resolved prior to any trial, whether through the acceptance of a formal written offer, by discussions between solicitors, or through a formal mediation with a mediator.

You will generally be required, or encouraged, to attend any mediation or trial. This is so that you can take advice from your litigation lawyers and give them instructions.

It is uncommon that a client or third party will be required to speak to the other side in any mediation. Usually, the parties will speak to the mediator, and the mediator will walk between the parties who are in two or more separate rooms.  

A client or third party may also be required to give evidence at trial to establish their claim. Generally, however, most of the ‘heavy lifting’ is done by expert evidence.

If your claim reaches mediation or a trial, our team of professional negligence lawyers will attend and advocate on your behalf or instruct a barrister to advocate on your behalf.

Each case is different, but many matters resolve within 6 to 24 months of commencing legal proceedings. Some cases can settle earlier, including prior to proceedings commencing, and some cases can take longer to resolve.

It is not possible to predict or outline everything that may or may not occur in a case, however, we can provide a general outline of some of the aspects that you may experience.

We will start by taking information from you about your claim and reviewing your documents. This allows us to build a case on your behalf. This can take anywhere from a few days to several weeks, depending on the complexities of your case.

We may need to obtain expert evidence, particularly if the matter or damages are not straightforward. In some cases, this can take a few weeks to a few months depending on the complexity and the availability of your expert.

We will then attempt to contact the other side to reach a settlement. If successful, this would avoid the need of commencing proceedings, and the matter will finalise, typically with a deed of settlement and payment to you.

In cases where you commence proceedings, generally we will require about a month to prepare your claim, a month to receive the defence from the other side, and two weeks to lodge a reply to the defence.

The next stage of the proceedings is less structured, but it will typically involve:

• Disclosure (usually a month),
• Mediation (usually 1 to 3 months depending on each party’s and the mediator’s availability),
• Any applications to court (usually 1 to 3 months).

After disclosure (and often after the other side has obtained their own expert evidence), it is common for the parties to amend their claim and defence, which will usually add a further 1 to 2 months.  

Most cases settle prior to a trial, but if a trial is requested it can take a further 1 to 6 months for the trial to be heard.

Extensions given to both parties, the period over Christmas, and other matters may extend the time it takes to resolve your claim.  

Once the trial is over, you would ordinarily expect a judgment within 1 to 3 months.

If you are awarded damages, you would usually expect payment within 1 month of receiving the court’s judgment.

You would usually expect payment of your legal costs within 2 to 3 months, as typically, negotiation on the sum of legal costs payable, or a costs assessment, will need to occur.

Appeals can be lodged within a month after a trial, and on occasion, after applications. Appeals can add several months, and in some cases years, to the process. However, appeals are not as common as most people imagine. Further, payments of damages and costs are not usually permitted to be withheld, even if an appeal is lodged.  

In some rare cases, the entire case will need to have a second trial. A second trial would add several additional months.

How matters progress, and how early they settle, is often up to the client or third party’s appetite to settle quickly. As a general rule of thumb, you will receive a lower settlement sum if you settle quickly, but you may be able to avoid commencing proceedings altogether if you are ready to settle.

The first important task of a lawyer is to determine whether the client or third party has a claim for professional negligence, or potentially a different claim.

Drafting and filing compliant court documents in Queensland is a special skill that is developed with experience. Claims are regularly struck out with adverse costs orders in the tens of thousands against individuals who attempt to navigate the court system without the use of an experienced lawyer.

If you have prospects of succeeding in your case, our litigation lawyers can advise you about your rights, negotiate on your behalf, obtain and review evidence, prepare and file your court documents and guide you through the court process.

No lawyer can guarantee you success, but Gibbs Wright Litigation Lawyers are one of the few dedicated litigation law firms in Queensland. Our experience and dedication to resolving disputes is what sets us apart.

Accountants and auditors can be sued in many different ways depending on the circumstances.

Not every cause of action is listed below, but some causes of action against accountants and auditors include:

•       Professional negligence
•       Breach of contract
•       Misleading or deceptive conduct
•       Breach of a consumer guarantee
•       Breach of statutory duty
•       Breach of trust
•       Breach of fiduciary duty

It is unusual to only commence proceedings for professional negligence, because if you are unable to establish all of the elements of negligence, you will lose the case.

Experienced litigation lawyers will typically bundle up many different types of claims (also called causes of action) into one claim against your accountant or auditor.

Each cause of action can have different advantages and disadvantages. This includes what needs to be proven, the amount of damages that can be claimed, and when limitation periods start to run.

By claiming multiple causes of action, you can maximise your damages, whilst reducing your risk.   

Gibbs Wright will be able to assess your case and the causes of action that may be available to you.

Legal fees play a big role in professional negligence cases. At the end of almost all professional negligence trials, a decision will be made about the payment of legal costs.

There are two main types of legal costs: standard costs and indemnity costs.

Standard costs can be determined primarily by reference to a schedule of fees payable for certain tasks. For example, for each 100 words written in a letter. Expenses (including any expert and barrister’s costs) will typically be recovered in full, even on a standard basis. Generally, a standard costs order will recover a majority of all of the legal fees and expenses you have paid, but there will be a gap. Each matter is different, but it is not uncommon for around 60 to 70% of your legal costs to be recovered on the standard basis in the District and Supreme Court of Queensland.

Although most people assume 100% of legal costs will be recovered, the court needs to provide a way to encourage disputing parties to settle.

Indemnity costs are more commonly awarded when one party has made a reasonable offer, but it is rejected by the other party. Indemnity costs recover much more of your legal fees, give or take around 90% in many cases.

It is possible for a client to be successful at trial, but due to the client unreasonably rejecting a settlement offer, needing to pay the other side’s legal fees from the date they failed to accept a reasonable offer. This is because had the offer been accepted, any work from that point was unnecessarily incurred.

It is also possible that a client with two distinct claims wins one part but loses the other part. This requires an adjustment to a legal costs order. Although this is not as common in professional negligence cases compared to many other commercial litigation matters, it can occur.  

It is also important to appreciate that most matters settle without a trial. When cases settle prior to a trial there will typically be a single ‘global’ sum of money to be paid from one side to the other side. This global sum will typically include consideration of legal fees, but because a settlement is a compromise, a client or third party should not expect to recover all of their legal fees.

Additionally, before any trial there are usually several mentions (less serious issues) and applications (more serious issues) that are brought by either side. There are many different applications brought for all types of reasons. Common applications relate to issues with the documents filed by the other side, disclosure, or the conduct of the proceedings generally.

At the conclusion of an application, and to a lesser extent, mentions, costs may be ordered. Sometimes, the issue on costs will be ordered to be decided at the end of the trial. Sometimes the court will decide that there should be no order as to costs, particularly if there is no clear winner.

The answer to whether you can claim back your legal fees in a professional negligence case can seem complicated, and there are a lot of factors at play, however, most successful litigants will recover at least some of their legal costs. Making reasonable offers, and ensuring you do not reject reasonable offers, will protect your costs position.

Unfortunately, the answer is typically no.

Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. A shareholder cannot sue for the loss in value of their shares where that merely reflects the loss suffered by the company.

Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so).

Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.

There may be other causes of action available to a shareholder. Contact our litigation lawyers to discuss your options.

In almost all scenarios, the answer is yes. A retainer between a client and an accountant or auditor will include both a contractual term that the accountant or auditor must exercise reasonable care and skill in performing its tasks (even if the term is not expressly written into the contract), as well as the Australian Consumer Law which provides that there is a guarantee that the services will be rendered with due care and skill.

Contact our litigation lawyers to discuss your circumstances.

Sometimes, but it depends on the circumstances. There are many circumstances where a fiduciary duty may arise. Comedian and TV personality Steve Harvey once stated that he owed $22 million to the IRS after his accountant misappropriated his funds over a 7-year period.

The accountant in that scenario would have had a fiduciary duty, particularly because they received money from Mr Harvey. The accountant would have had the duty to account for those monies, to prove that they were distributed correctly, and would have been in breach of their fiduciary obligations by not remitting the money to the IRS. The accountant would have been liable for repayment of the $22 million, plus any interest or penalties incurred by Mr Harvey with the IRS.

If a fiduciary duty is established, that will typically also mean that the accountant or auditor cannot use the confidential information provided to it, or its position, to obtain a profit, except for that permitted in the retainer. If they do, then they risk legal proceedings.

In Queensland, causes of action in breach of contract, breach of the Australian Consumer Law, and breach of professional negligence typically must be made within 6 years from the date that the action accrued (medical negligence causing personal injury has shorter limitation periods).

When an action will accrue are slightly different for contract and professional negligence. For example, in the case of Pech v Tilgals, the client was out-of-time to sue under contract, because a claim had been made more than 6 years after the accountant had lodged incorrect tax returns which gave rise to a claim for breach of contract. However, in tort, the action arises when the damage is suffered, and that was at the point when the Commissioner of Taxation issued their assessment notice. The discrepancy allowed the client to sue for professional negligence, but not in contract.  

It should also be noted that there are several exceptions that may apply if you are outside the 6-year period. This includes (but is not limited to) cases of fraud, or when money is held on trust. In cases of fraud, the 6 years will start to run from when you discovered the fraud. In some cases of money being held on trust, no limitation period will apply.

In some cases, the exact time when a limitation period begins, and when it ends, can be disputed. You should also be cautious when relying on an exception to the 6-year rule as courts can be reluctant to find that an exception applies.

Separately from the limitation periods, it is often beneficial to commence proceedings as soon as possible, as it is often easier to recall conversations in specific detail or to uncover documents and other evidence, which may otherwise be lost over time. 

Make sure you obtain legal advice as soon as possible if you have been the victim of professional negligence to ensure you don’t lose your right to receive compensation for any loss you have suffered. Contact Gibbs Wright without delay to discuss your matter.