The Dutch Supreme Court recently decided (ECLI:NL:HR:2019:744) that the standard for audit firms' and accountants' duty of care towards third parties is in essence no different than the general duty of care under Dutch tort law, and ultimately depends on the circumstances of the case. However, the role of accountants in society, their responsibility to serve the general interest, and rules of professional conduct and practice play an important role.
Following indications of irregularities in its financial administration, a company had suspended its general director and engaged an audit firm to investigate. The audit firm found irregularities pertaining to the director's travel and representation costs. The director was allowed to inspect parts of the audit firm's draft report (70 pages), but was not given a copy. The director refused to comment orally on the spot, but later submitted a written response. The final report (86 pages and 100 annexes) also included the audit firm counter-response to the director's response (included as one of the annexes). The audit firm's findings were upheld in court and the court terminated the director's contract. Subsequently, the director initiated proceedings against the audit firm, claiming damages. According to the director, the audit firm acted unlawfully because its investigation was flawed and it had not adequately heard both sides. The District Court rejected the claim, but the Court of Appeal decided in favour of the director.
Court of Appeal
In its decision, the Court of Appeal took the standard for the contractual duty of care of audit firms and accountants as a starting point. Towards clients, accountants have to observe the standard of the "reasonably competent and reasonably acting accountant". The Court of Appeal held that the same standard applies to accountant's duty of care towards third parties, because of accountants' particular role in society. The Court of Appeal also took the rules of professional conduct and practice on what are known as "person-oriented investigations" into account, as these were declared applicable in the contractual relation between the audit firm and the company. In view of these rules and procedures, the Court of Appeal decided that the audit firm's refusal to provide the director with a copy of the most relevant parts of the draft report was not justified. The Court of Appeal considered that the report was extensive and that it was foreseeable to the accountant that the director's employment contract was at stake. It also considered that the refusal to provide a copy of the draft report had deprived the director of the opportunity to privately examine the report and discuss it with his legal advisers. On these grounds, the Court of Appeal decided that the audit firm was liable towards the director.
Before the Supreme Court, the audit firm complained that the decision of the Court of Appeal was wrong because it had applied the standard for contractual liability: the standard of the "reasonably competent and reasonably acting accountant". The Supreme Court agreed. In its decision of 17 May 2019 (ECLI:NL:HR:2019:744), it decided that the standard for non-contractual liability towards third parties is the general duty of care under Dutch tort law. This is the rule that one's conduct should be in conformity with "societal standards of care", an open norm decided by the circumstances of the case. The Supreme Court, however, emphasised accountants' roles in society and their responsibility to serve the general interest. In addition, the Supreme Court emphasised that, in the Netherlands, accountants' and audit firms' professional bodies bear a statutory obligation to issue rules of professional conduct and practice. These rules give expression to the responsibilities of accountants to their clients and to third parties. These rules therefore "co-determine" accountants' duty of care in tort, and have to be taken into account, including the rules on person-oriented investigations in this case.
Contractual versus non-contractual duty of care
As it appears, the difference between these two standards is subtle. In determining both accountants' contractual and non-contractual duty of care, their role in society and the question whether the accountant has observed professional rules of conduct play an important role. Tellingly in this respect, the Supreme Court concluded that the Court of Appeal had indeed applied the wrong standard, but "in substance" had not failed to appreciate the standard and "framework for assessment". Having said this, the difference between contractual and non-contractual liability remains of great importance. The violation of a professional rule will normally result in violation of a contractual duty of care, and therefore non-performance and contractual liability towards a client. Violation of such a rule, however, does not ''automatically" result in non-contractual liability against any third party suffering damage as a result, as the Court of Appeal justifiably noted in its decision. Under Dutch law, the damage should (for instance) be within the protective scope of the violated provision, and should have been reasonably foreseeable.