Claims Against Accountants and Auditors

Whether an accountant owes you anything usually turns on one question: what was the work actually done for?

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Audit FailuresNegligent AdviceTax ExposureLivent

Auditor Liability | Bad Advice | Tax Consequences | Recovery

Where these claims turn.

Liability tracks the purpose the engagement was undertaken for, not the loss that happened to follow.

A statutory audit is prepared for the shareholders as a body, not for individual investment decisions.

CPA Ontario handles conduct. It cannot award you money or resolve a fee dispute.

A loss in share value is often the corporation’s claim rather than the shareholder’s.

Quick Answer

Can I sue an accountant for negligence in Ontario?

Yes, but the scope of the duty is narrower than most people expect, and that is the first thing to test. In Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, the Supreme Court accepted that reliance on audited statements was foreseeable, then negated the duty at the policy stage over indeterminate liability. The controlling point was purpose: a statutory audit exists so shareholders as a body can oversee management, not so individual shareholders can make personal investment decisions. Twenty years later, Deloitte & Touche v. Livent Inc., 2017 SCC 63, refined this. An auditor can be liable for a client’s economic loss, but only for losses flowing from the purpose for which the work was undertaken. Deloitte was liable for a negligent statutory audit and not for a comfort letter prepared for a different purpose. So the question in any claim is not simply whether the work was careless, but whether the loss you suffered is the kind the engagement was meant to guard against.

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THE PURPOSE TEST

What Was the Work For?

This is the analytical heart of accountant liability in Canada and it is worth understanding before anything else. Two identical acts of carelessness can produce liability in one case and none in the other, depending on why the work was done.

Livent illustrates it precisely. The same firm was liable in respect of a statutory audit, because the purpose of a statutory audit is to allow the company to be overseen and the losses flowed from the failure of that oversight function. It was not liable in respect of a comfort letter and offering documents prepared to support a debenture underwriting, because losses of that kind fell outside what that particular undertaking was for.

For a claimant this means the engagement letter is often the most important document in the file. It usually records the purpose, the scope and the limits, and courts take it seriously. A claim that ignores the retainer and argues from the size of the loss tends to fail.

THE COMMON CLAIMS

Audits, Advice and Tax

Audit claims are the classic category and the hardest, for the reasons above. They usually arise where a fraud or a misstatement went undetected and the company or its lenders suffered as a result. The defence is generally that an audit is not designed to detect all fraud and that management representations were relied on.

Advisory claims are more common and often more straightforward. An accountant advises on a transaction structure, a reorganisation or a valuation, and the advice is wrong in a way that costs money. Here the retainer is usually narrower and clearer, and the purpose test is easier to satisfy.

Tax claims sit slightly apart. A filing position that attracts reassessment, interest and penalties produces a loss that is easy to quantify, which is an advantage. The difficulty is that many tax positions are genuinely arguable, and taking an arguable position that the Canada Revenue Agency later rejects is not by itself negligence.

THE REGULATOR

CPA Ontario Handles Conduct, Not Compensation

CPA Ontario regulates the profession and will consider complaints about professional misconduct. What it will not do is give you money. Its own guidance is explicit that the complaints process is not a forum for resolving fee or financial disputes.

That leaves the civil claim as the only route to compensation, and it is worth being clear about this at the outset, because a complaint takes time and can affect what is later said in a claim.

Where a complaint is genuinely appropriate, on conduct rather than on money, it can proceed alongside a claim. As with every regulated profession, what is written to the regulator may be read by the other side later, so it should be drafted with that in mind.

WHO CAN SUE

The Company, or the Shareholder?

A recurring obstacle is that the person who feels the loss is not the person entitled to claim it. Where an accountant’s negligence reduces the value of a company, the loss is usually the company’s. A shareholder claiming for the diminished value of their shares is generally bringing a derivative loss, which belongs to the corporation.

That was part of the reasoning in Hercules and it catches people out regularly, particularly in owner managed businesses where the distinction between the person and the company feels artificial. It is not artificial in law.

There are routes around it, including a derivative action brought with leave, and claims by shareholders for loss that is genuinely personal rather than reflective of company loss. Which applies depends on the facts, and getting it wrong at the pleading stage is expensive.

Common Questions

Frequently Asked Questions

Does an auditor owe a duty to me as a shareholder?

Usually not for your personal investment decisions. Hercules held that a statutory audit is prepared for the shareholders as a body so they can oversee management collectively, not to guide individual buying or selling. A duty may exist where the accountant undertook the work for your purpose specifically, which is a question about the retainer.

What is the difference between Hercules and Livent?

Hercules denied a duty to individual shareholders relying on a statutory audit, on indeterminate liability grounds. Livent, in 2017, held that an auditor can be liable to its client but only for losses flowing from the purpose the work was undertaken for. Read together, purpose is the controlling idea in both.

Can CPA Ontario order my accountant to repay me?

No. CPA Ontario deals with professional conduct and states that its complaints process is not for resolving fee or financial disputes. Compensation requires a civil claim.

Is a CRA reassessment proof my accountant was negligent?

No. Many tax positions are arguable, and the CRA taking a different view does not establish that taking the position fell below the standard of a reasonably competent accountant. What matters is whether the position was one a competent practitioner could have taken on the information available, and whether the risks were explained to you.

How long do I have to bring a claim?

Generally two years from discovery under the Limitations Act, 2002. In accounting cases discovery is often later than the work, because the loss may not surface until a reassessment, an audit or a transaction reveals it. The fifteen year ultimate limitation still applies from the act or omission.

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The engagement letter and the scope of the retainer usually decide these cases. Send those and the correspondence, and we can tell you fairly quickly whether the loss you suffered is one the work was meant to prevent.

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Claims Against Accountants and Auditors

Can I sue an accountant for negligence in Ontario?

Speak to a Professional Negligence Lawyer

What Was the Work For?

Audits, Advice and Tax

CPA Ontario Handles Conduct, Not Compensation

The Company, or the Shareholder?

Frequently Asked Questions

Discuss a Claim Against an Accountant

Lexaltico LLP

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