Suspected fraud in audits: risks for companies and shareholders

A recent High Court decision has provided important clarification on the limits of an Auditor’s duties when fraud is suspected and in particular, whether Auditors are ever required to report concerns directly to shareholders.

In The Wine Enterprise Investment Scheme Ltd (in liquidation) (the “Company”) v Crowe UK LLP (the “Auditors”) [2026] EWHC 692 (Ch) case, the Court held that an Auditor owed no duty to report suspected fraud directly to individual shareholders, even where all of the Company’s directors were allegedly implicated in the wrongdoing.

The background

The Company raised approximately £4,235,160 from shareholders in order to invest in wine. The Company entered Members’ Voluntary Liquidation on 10 January 2020, where the declaration of solvency stated that £4,515,339 was held at the bank, when in fact only £6.50 was held.

The Company’s accounts were audited throughout 2012 to 2018 and substantial sums were recorded as deposits with a Bermudan company, Lilliput Holdings Limited (“Lilliput”).

Lilliput was a fictitious company. It held no bank account and monies were instead diverted through to other accounts.

The Company (acting via its liquidators) argued that the Auditors should have, or ought to have been aware of the fictitious company, the dishonesty of the directors and had a duty to notify the shareholders.

Causation

The Auditor admitted that it had fallen below the standards expected when conducting the audits, including the failure to obtain adequate records for the deposits and failing to identify Lilliput as a related party until 2016.

However, the Auditor argued that the Company failed to establish that those breaches were the main cause of the losses incurred. Instead, the Auditor argued that the losses were the caused by the directors.

The Court’s key finding was that, even if the Auditor had reported concerns to the Company, or its management, it would not have realistically prevented the loss. In other words, the Court found that the only individuals capable of acting for the Company were the directors who were also accused of dishonesty.

The Court found that the directors would not have investigated themselves because they have engineered all of the matters giving rise to the fraud.

This finding significantly limited the Company’s recovery under the claim, notwithstanding the seriousness of the Auditor’s failings.

A duty to report directly to shareholders?

The Company attempted to re-amend their claim to include a claim that a competent Auditor should have, and was under a positive duty to, report the fraud directly to the shareholders in circumstances where all the directors were involved or suspected of being involved in the dishonest activity in question. And that the Auditor should have resigned having disclosed the fraud and thereby exposing the wrongdoing.

The Court refused permission to amend on two grounds. Firstly, that the Company was out of time to bring the alternative claim and secondly the claim, even if the amendment were allowed, had no reasonable prospect of success.

The Court’s analysis

The Court undertook a detailed analysis of the statutory and professional framework governing auditors’ duties and rejected the existence of any direct shareholder‑reporting obligation.

Neither the Companies Act 2006 nor the International Standards on Auditing (UK) imposed a duty on auditors to bypass the Company and report suspected fraud directly to shareholders.

The Court also relied on the Auditor’s engagement letter, which made clear that the Auditor was reporting to the members as a body and accepted no responsibility to any other person. That wording sat squarely against the existence of any wider, implied duty of direct communication.

The Court also acknowledged the practical consequences that an Auditor would face in attempting to directly inform the shareholders.

If the Auditor had issued a resignation statement (under section 519 CA 2006) the statement is likely to have been cautious and high level: i.e. “we formed the opinion that the Company was not handling its affairs appropriately and were therefore not prepared to continue”. It would not have been a detailed explanation of the concerns.

There are also constraints arising from data protection and defamation laws, which further limit Auditors’ ability to contact shareholders.

Obligation to report under Proceeds of Crime Act 2002

An important consideration is that, once fraud is suspected, an Auditor is under an obligation to make a Suspicious Activity Report and any subsequent disclosure to the shareholders could constitute a criminal offence by way of ‘tipping off’ or prejudicing an investigation.

Precedent: no support for a direct duty

In consideration of the above, the Court found that there was no duty for the Auditors to inform the shareholders.

This finding followed the law as set out in Caparo Industries plc v Dickman, whereby the House of Lords confirmed that Auditors report to members as a collective body through the statutory framework, not to individual shareholders.

Contributory negligence and apportionment

The Auditors made a number of serious failings. However, the Court found that the dominant cause of the loss was the actions and dishonesty of the directors.

As a result, the Auditors were only ordered to pay damages for the admitted breaches of duty (negligence) and the damages were reduced to 50%.

Key takeaways for companies, directors and insolvency practitioners

This decision provides several important lessons:

• There is no general duty on Auditors to report suspected fraud directly to shareholders, even where all directors are implicated.
• The statutory resignation and reporting frameworks offer a form of protection.

For boards, funders and investors, the case underlines the importance of robust internal governance, independent oversight and early intervention mechanisms, rather than reliance on external Auditors as a final backstop.

How Morr & Co can help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Dispute Resolution team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you.

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Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.