Jersey: The Limits Of Audit: Public Perceptions And Legal Realities

Last Updated: 24 September 2019
Article by Oliver Passmore and Alex Horsbrugh-Porter
Most Read Contributor in Jersey, September 2019

Patisserie Valerie

Patisserie Valerie entered into administration at the start of this year following the discovery of fraud within the company. It is thought that inflated profit margins and sale figures and thousands of false entries in the company's ledgers caused the company's accounts to be overstated by approximately £94m. These factors were not identified by Grant Thornton when it conducted its audit. This was despite the fact that suspicions were raised by HMRC over two years ago.

Luke Johnson, a successful entrepreneur and the majority shareholder in Patisserie Valerie, wrote in his article in the Sunday Times1 that "In business, as in life, there are certain documents and facts you rely on. They might be audited accounts, bank balances, a passport or a qualification. If these are fake, you wonder what is real and what is not."

Expectations v Reality

On a board-brush approach Luke Johnson's reliance on audited accounts seems reasonable. Not least because the statutory requirement to audit makes it clear that, even in the absence of a contract with the individual shareholders, the auditor's report is provided to the shareholders as a whole. So the auditors must reasonably know, especially if the company is listed, that  shareholders will rely on the information contained within that report. Furthermore, since the auditors are both qualified and paid for their work, there is an expectation that the report will be prepared with reasonable skills and care.

However the situation is more nuanced and complicated in practice.

Auditors report

As is commonly known an audit involves a detailed examination of the financial reports for a company. The balance sheet, income statement, statement of cash flows and note disclosures are evaluated against some form accounting criteria, either GAAP or IFRS.

It is true that Auditors report is addressed to the shareholders. However, the audit review is limited to those entries which are 'material' (i.e. above a certain benchmark in terms of monetary value  or frequency). This is because it would be impossible for auditors of a large company to check every single entry. Also, the audit reports are subject to a number of qualifications which limit the scope and reliance which can be placed on them. By way of an example, 'The Audit Report and Auditor's Duty of Care to Third Parties' Report prepared by ICAEW recommend that the following wording is included:

  • "To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our work, for this report, or for the opinions we have formed." (paragraph 10)
  • "In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting..." (Appendix 1)

The Courts in England & Wales have reiterated that the purpose of accounts is to "enable [members] to question the past management of the company, to exercise their voting rights, if so advised, and to influence future policy and management. Advice to individual shareholders in relation to present or future investment in the company is no part to the statutory purpose for the preparation and distribution of the accounts"2 (underline added).

Duty of reasonable skills and care

The auditors' "duties are duties of reasonable care in carrying out the audit of the company's accounts. They are owed to the Company in the interests of its shareholder. No duty is owed directly to the individual shareholders (underline added). This is because the shareholders' interests are protected by the duty owed to the company"3

However this begs the questions, why, if the shareholders' interests are protected by the duties owed to the company, do these matters keeping coming before the Courts? Also, why do the Courts In England and Wales refuse to extend the duties of auditors to individual shareholders and/or confirm an additional duty of care in tort?

Some of the reasons that have been proffered in the judgments are that:

  1. the company will have its own cause of action for the same losses as the shareholders could claim. That cause of action would constitute a bar to any shareholder suing because of the principle against reflective loss4
  2. trading losses from an unprofitable business are not caused in law by the auditor's negligence, even if  these losses would not have been incurred but for the auditor's breach of duty to exercise reasonable skill and care to the company;5
  3. responsibility for preparing the financial statements and assessing whether they give a true and fair value rest with the directors of the company. This is because they are responsible for the internal controls etc. to ensure that they are free from material misstatement; and
  4. auditors are "watchdogs and not bloodhounds"6.

Nevertheless there is still, evidently, a gap between shareholders' expectations and auditors'  expectations. It remains to be seen whether and how  this gap can be bridged. Some possible routes to resolution include intervention by GAAP and IFRS via their policies, appraising shareholders of their rights from the outset and the auditors being more frank in their auditors reports.



2 Caparo Industries plc v Dickman [1990] 2 AC 605 p 660

3 Stone & Rolls [2009] 1 AC 1291, p.19

4 [1989] QB 653

5 Galloo v Bright Grahame Murray [1994] 1 WLR 1360

6 Re Kingston Cotton Mill Co (No 2) [1896] 1 Ch. 331

This article first appeared in Accountancy Daily.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions