Accountant fails to include continuity statement and must provide integral copy of its audit file to trustees

When is an auditor required to provide a copy of his audit file if he is accused of improperly failing to include a continuity reservation?

The Amsterdam court recently considered this question in the context of the bankruptcy of PaperlinX B.V. What was going on?

Continuity paragraph

PaperlinX B.V. is a subsidiary of PaperlinX Netherlands B.V., in turn a subsidiary of PaperlinX Holdings B.V. In 2015, these companies were declared bankrupt. The issue is that the trustees suspect that the auditor made errors in the audit of the consolidated financial statements, as unqualified opinions were allegedly issued without including a going concern paragraph. This could have resulted in creditors being disadvantaged, as they would have supplied goods and services to PaperlinX B.V. based on the wrongly created appearance of creditworthiness. In support of their claims, the trustees want a copy of the audit file.

Complaint procedure Auditor's Office

The proceedings at the Amsterdam District Court were preceded by the Auditors' Chamber's consideration of a complaint that concerned, among other things, the refusal of one of the auditors involved to provide information for the purpose of the trustee's investigation into the causes of PaperlinX's bankruptcy. The Chamber of Auditors ruled that the auditor in question should have provided generous insight into his work/audit findings to the trustees in the bankruptcy.

Exhibitieprodure

After the auditors refused to provide a copy of the audit file even after the decision of the Auditors' Office, the trustees went to court and claimed an order for the auditors to produce (a copy of) the audit file. The law offers this possibility in the form of so-called exhibiting proceedings (843a Rv) if three conditions are met, namely: (1) the claiming party (read: the liquidators) must have a legitimate interest, (2) the claim must relate to "certain" documents and (3) the documents must relate to a legal relationship to which the party demanding a copy thereof is a party. The interest for the trustees will be to be able to prove, on the basis of the audit file, that the auditor did have reason to include a going concern paragraph, and by failing to do so to be liable to creditors who provided PaperlinX with goods or services prior to the bankruptcy that they would not have provided, or under different conditions, had they known about PaperlinX's continuity problems.

Judgment of Amsterdam court

The court ruled (in brief) that the claim of the trustees met the requirements set forth above and should therefore be allowed. After all, according to the court, the trustees must now investigate the causes of the bankruptcy, and a possible error regarding the omission of a going concern paragraph may be grounds for the trustees to bring a tort claim against the auditor on behalf of the joint creditors. Thus, the legitimate interest is given. Moreover, the audit engagement is sufficient for the required legal relationship. Interestingly, while the court requires the auditing accountant to provide a copy of the entire audit file, the statutory regulation seems to rely on certain (specific) pieces of the file. The purport of that regulation is to prevent in practice a so-called fishing expedition. In this case, the question arises whether this risk is not present.