Law Report: Reporting Accountants Owed a Duty of Care to Law Society ; 5 July 2000 Law Society V KPMG Peat Marwick (Sued as KPMG Peat Marwick McLintock) and Others Court of Appeal (Lord Woolf, Chief Justice, Lord Justice Ward and Lord Justice Clarke) 29 June 2000

Article excerpt

A DUTY of care was owed to the Law Society by an accountant who prepared an annual report for a firm of solicitors under s 34 of the Solicitors Act 1974.

The Court of Appeal dismissed the appeal of the defendant firm of accountants against a decision of the Vice-Chancellor on a preliminary issue in proceedings brought by the the Law Society.

The defendant firm of accountants were retained by a firm of solicitors, Durnford Ford, to prepare their annual reports as required by section 34 of the Solicitors Act 1974 for the years ending 1989 and 1990 and 1991. In general, section 34 of the Act required every solicitor to deliver to the Law Society a report signed by an accountant. The report had to contain the information prescribed by the Accountants' Report Rules 1986. In addition, the accountant was required by the rules to indicate whether he was satisfied that, during the period to which the report related, the solicitor had complied with the rules.

If a solicitor complied with the rules it should be impossible for him to confuse his clients' money with his own or to inadvertently make any improper payments, which could lead to claims made on the compensation fund maintained and administered by the Law Society. If an accountants' report revealed non-compliance with the provisions of the rules, that would provide the Law Society with an opportunity to exercise its discretion to intervene in a solicitor's practice where it had reason to suspect dishonesty on the part of a solicitor.

In May 1992, the Law Society commenced an investigation into Durnford Ford and, shortly thereafter, the firm stopped practice. It was discovered that two of the partners in Durnford Ford had defrauded a number of its clients and, as a result, payments amounting to about pounds 8.5m were made out of the compensation fund.

As trustee of the fund the Law Society commenced proceedings against the accountants, alleging that, when preparing the accountants' reports, they had been negligent and had acted in breach of the duty of care which they owed to the claimant when examining the books and accounts and other records of Durnford Ford; and further, if they had qualified the reports as they should have done, the Law Society would have exercised its statutory power of intervention in Durnford Ford's practice and put an end to the dishonesty, thereby reducing the amount which was paid out by the fund. …