Auditor liable for not including a provision for a third party claim?

In a recent case, the Court of Appeal of Arnhem-Leeuwarden dismissed a claim of the bankruptcy trustee of Welsec against an audit firm for failing to ensure that the audited company, Welsec, included a provision in its annual accounts for a third party claim (ECLI:NL:GHARL:2020:2492). Although in fact several of Welsec’s annual accounts had not provided the insight requested by law, the auditor had not acted unlawfully by giving an unqualified audit opinion, as he was not (and should not have been) aware of all relevant facts. The court of appeal also ruled that the auditor did not have to warn Welsec’s board not to pay dividends.

Facts and claim

The State held Welsec liable for the costs of remediation of a harbour, and initiated proceedings. In first instance in 2005, the district court ordered Welsec to pay damages of almost EUR 1.3 million. Welsec did not include a provision for this in its annual accounts, only mentioning the conviction in the section titled ‘Off-balance sheet commitments’. It also stated that an appeal had been submitted, and that a provision had not been made because the size of the possible payment obligation could not be estimated in a responsible manner and with sufficient reliability. Meanwhile, from 2003 to 2009 inclusive, Welsec paid the full amount of its ‘other reserves’ and operating results as dividends to its parent company. If Welsec had included a provision, this amount would have been lower, as including a provision decreases the operating result. If the court of appeal were to find Welsec liable, a provision would have enabled Welsec to pay damages. However, Welsec did not include such a provision.

Welsec’s reporting did not change in the following years, even when the court of appeal rendered an interim judgment stating that it was satisfied that Welsec was prima facie liable. To determine the extent of its liability, the court of appeal ordered an expert examination. A preliminary expert report was issued in 2009 holding Welsec responsible for part of the pollution of the harbour. The lawyer’s letters concerning the years 2005-2009 (so even after issuance of the expert report) only mentioned that the damages awarded in first instance were likely to be reduced.

In 2011, the court of appeal determined that Welsec was liable for an amount of EUR 1.2 million. Welsec was declared bankrupt in 2012.

The bankruptcy trustee summoned Deloitte, Welsec’s auditor until 2009 inclusive, and requested a declaratory decision that the auditor had acted unlawfully, for two reasons. First, Welsec’s annual accounts from 2005 onwards did not mention that the accuracy of the ‘going concern assumption’ on which the annual accounts were based was subject to reasonable doubt. Second, the impact of this on Welsec’s equity and result had not been disclosed (contravening article 2:384(3) of the Dutch Civil Code (DCC)). Furthermore, the trustee accused the auditor of not having taken any control measures or issued any warnings. This could have prevented Welsec from facing continuity problems upon the State’s execution of the court’s first instance order.

Court of first instance

The district court ruled that the auditor should have advised Welsec to include a provision in the balance sheet in the financial years 2005-2009. If Welsec’s board subsequently refused to include such provision, the auditor should not then have provided an unqualified opinion. By failing to advise this and subsequently providing an unqualified opinion, the district court concluded, the auditor acted unlawfully. However, the court dismissed the claims due to the absence of a causal relationship between the unlawful acts and the losses.

Court of appeal

The court of appeal, however, ruled differently. It stated first that in order to answer the question whether the auditor has acted unlawfully (and is therefore liable towards creditors of the company), it should be assessed what may be expected from a reasonably acting and reasonably competent auditor in the context of the proper performance of its duties. The required level of care towards third parties depends on all circumstances of the case (Supreme Court 13 October 2006, ECLI:NL:HR:2006:AW2080 (Vie d’Or)).

In its assessment of the claim, the court made a distinction between the annual accounts before (2005-2007) and after (2008-2009) the report made by the court-appointed expert in which Welsec was found responsible for part of the pollution of the harbour.

Annual accounts 2005-2007

The court agreed with the auditor that he was allowed to consider the assessment of Welsec’s board (i.e. not to include a provision during these years) to be correct. The auditor did not have to conduct an investigation into the likelihood of success of the appeal, nor the State’s reasons for not taking any enforcement measures. Although the interim judgment of the court of appeal in November 2007 made clear that Welsec was still (prima facie) held responsible for a part of the pollution, the extent of its liability was unclear. By including the notes to the balance sheet, and particularly by stating the amount of the damages awarded in first instance, the annual accounts provided the required insight and enabled the auditor to provide an unqualified opinion for this period.

Annual accounts 2008-2009

According to the Court of Appeal, from the issuance of the expert report in 2009 onwards, the allowance of damages in the appeal should have been seriously taken into account. Therefore, in principle, the auditor should have advised the company to include a provision. However, the auditor had not been informed of this report. Based on a report of a meeting between the board and the auditor in 2010, and the lawyer’s letter concerning the year 2009, the auditor knew only that the appeal was still pending. The court of appeal therefore ruled that the auditor cannot be blamed for not taking into account the expert report in its assessment to include a provision or not. Hence, the court concluded that the auditor had not acted unlawfully by giving an unqualified audit opinion.

Payment of dividends

The trustee also claimed that the auditor should have warned Welsec’s board concerning its decisions to pay the full operating results as dividends during the years 2003-2009. The court of appeal ruled that the board could have easily concluded that by skimming the full profits of Welsec, it would not have sufficient resources to comply with a condemning judgment in the proceedings vis-à-vis the State. Therefore, the auditor did also not act unlawfully in this respect. The court of appeal dismissed all claims.


An auditor may not be liable for the unjustified omission of a provision for a third party claim in the annual accounts of the audited company if that auditor is not properly informed of all relevant facts, such as, in this case, the appearance of a court-appointed expert report. However, it is important to note that this may vary if the auditor has any reason to suspect that relevant facts are being concealed from him/her, in which case he may have to request more information.

The post “Auditor liable for not including a provision for a third party claim?” is a post of

Gertjan Boekraad
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Cas Michiels
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