Heron & Brearley and its retail subsidiary have accused their auditor of negligence over a potentially fraudulent £488,000 discrepancy in the accounts.

A pre-action hearing in the high court was told that two managers at Mannin Retail received significant pay increases and bonuses as a result of the company appearing more profitable than it was.

Auditor Grant Thornton is accused of failing to protect the companies they had audited from ’material misstatement, whether caused by fraud or error’, a judgment, which has been published on the courts’ website, reveals.

The court heard that it was the view of Heron & Brearley bosses that the two managers ’had a part to play’ in the overstatement of stock.

Mannin Retail operates a chain of convenience stores, fuel forecourts and in-store post offices around the island.

Heron & Brearley group financial director Neil Kelly, who is also a director of the retail subsidiary, told the court that in 2018 it was discovered that there was a cumulative over-statement of stock in the accounts, amounting to about £488,743.

This had the effect of making it appear that Mannin Retail had more assets and was more profitable than in fact was the case.

As a result, significant pay increases and bonuses were paid to two managers, which would not have been made had the true financial position been known.

This over-statement in the accounts disguised the true level of stock leakage - loss of stock without payment - so that steps which would have been taken to combat this issue were not taken at the appropriate time.

’It is Mr Kelly’s view that the two managers had a part to play in the overstatement of stock,’ the judgment reads.

’However, his view is also that the respondent failed as auditors to protect the companies they had audited from material misstatement, whether caused by fraud or error and that a reasonably competent audit would have identified the misstatement in stock.’

By way of example, the stock sheet showed a stock valuation for the Spar store at Peel of £51,536.98. This figure will have been available to auditors during their stock testing at the site. But Mr Kelly stated that, despite this being the case, the stock valuation figure for the store used in the annual accounts showed a figure of £98,525.73.

The applicants allege that they have a ’good arguable case’ that Grant Thornton ’acted negligently and/or in breach of contract’ in respect of audits which it carried out for the companies during the period 2014-18.

They applied for an order seeking the disclosure of the documents they need to fully particularise their claim.

Deemster Andrew Corlett granted an order that Grant Thornton disclose all working papers in respect of its audits of the two companies for the financial years ending 2014, 2015, 2016, 2017 and 2018.

He noted that pre-action disclosure orders should not become a matter of routine in professional negligence cases.

But he said that this case arguably fell outside the usual run of such claims as the applicants did not have sufficient documentation to obtain the necessary expert’s opinion.

Pre-action disclosure was the only method available to them to formulate and plead the claim in a proper way, the Deemster said.

He also noted that applications for pre-action disclosure are not meant to be a mini-trial of the action.