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Professional Negligence and Misrepresentation by an Audit Firm


Elvis, a shareholder in Holly plc, read the company’s audit, which had been prepared by Mercury & Partners. The audit valued the assets of Holly plc at £8 million. On the strength of that, Elvis purchased more shares. His wife, Dionne, also read the audit and bought some shares in Holly plc for herself. Another company, Ivy plc, who already owned some Holly shares, had also seen the audit prepared by Mercury. They contacted Mercury, saying they were considering a takeover of Holly plc, and asked for further financial projections about Holly’s likely performance. This was supplied by Mercury and following this Ivy purchased enough of Holly’s shares to take over the company.

Excited by the thought of his impending riches, Elvis decided to drive his friend Kate to the airport so she could catch an overnight plane to Canada for an important meeting. They were held up in traffic and Kate was convinced she would miss her flight. After they had waited at a red light for a long time Kate shouted: ‘You stupid fool, the lights have jammed. There is not a thing in sight. Get a move on’.  Elvis could not see any traffic approaching and moved across the junction. He hit a bicycle ridden at speed by Edward, who is wearing dark clothing and has no lights on his bicycle. Kate, who is not wearing a seat belt is injured and Edward who suffers from a heart condition has a heart attack brought on by the stress of the accident.

It has since become known that Mercury & Partners carelessly prepared the audit and that, in truth, the assets of Holly plc were worth only £1 million. As a result, Elvis and Dionne have each lost £100,000 on their shares. The financial projections prepared by Mercury for Ivy were also shown to be wrong causing a large loss to Ivy plc.

Critically discuss how the law of negligence might be applied:

(i)    To Elvis and Dionne’s claim against Mercury
(ii)    To Ivy’s claim against Mercury
(iii)    To Edward and Kate’s claim against Elvis


This is a sample case study which deals with negligence. An audit firm which misrepresented the financial position of a company had been sued for professional negligence by a third party who invested in the company whose financial position had been misrepresented. The possible claims in the above case have been given in the solution.

Total Word Count 1497

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