ICAEW first issued guidance in January 2003, following a Scottish judgment in Royal Bank of Scotland plc v Bannerman Johnstone Maclay and others, which highlighted the potential exposure of auditors to parties, other than the members of a company as a body, who assert that they rely on audit reports, in circumstances where the auditors have failed expressly to disclaim responsibility to those third parties.

ICAEW took legal advice which recommended that auditors who wish to manage the risk of liability to third parties use wording expressing clearly to whom they owe a duty of care (a ‘disclaimer’). The disclaimer recommended by ICAEW has subsequently been widely used by the profession in the statutory and non-statutory audit and other assurance reports of a range of entities.

Following a more recent judgment, as well as a number of changes to audit reports, ICAEW has again taken the advice of leading counsel and has updated the Bannerman guidance.

This includes new details about the positioning of the Bannerman paragraph, which legal advice has suggested, and ICAEW agrees,  should be at the bottom of the audit report, after auditor’s responsibilities and immediately above the signature of the auditor.

Firms also need to be consistent in where they position the paragraph in their audit reports, so that clients and others reading them know where to expect to see it.

ICAEW says the 2015 judgment of the High Court in England in the case Barclays Bank plc v Grant Thornton has provided further clarification which is incorporated in the updated guidance.

The case concerned non-statutory audit reports prepared by the defendant auditor, which were passed to the claimant bank. There was no contract between the bank and the auditor. The bank alleged that the reports had been prepared negligently; that the auditor must have known that they would be passed to it; and that it had suffered loss as a result of relying on the misleading reports.

It further alleged that the auditor owed it a duty of care in tort. The auditor made a summary application for the claim to be struck out on the ground that the presence of a Bannerman-type disclaimer in the reports made it impossible for the bank to prove that it was owed a duty of care.

The judge accepted this argument and struck out the claim. His judgment recognised that such disclaimers are commonly incorporated in audit reports. In effect, he held that users of audit reports can be expected to be commercially sophisticated parties, and that there is no good reason not to give effect to the terms of a clearly expressed disclaimer.

ICAEW says it believes that the Barclays decision provides strong support for the approach which it has been recommending to members since 2003.

The updated guidance also reflects the revised International Standard on Auditing (ISA) (UK and Ireland) 700 issued in June 2013. The Independent Auditor’s Report on Financial statements. This requires auditors reporting on companies which comply with the UK corporate governance code to provide significantly increased disclosure around risks, materiality and scope of the audit.

The May 2018 advice provides details of where the disclaimer should be placed and of the form of working for both the disclaimer and for engagement letters, and also contains an appendix covering possible responses to questions from clients to auditors about the disclaimer.

ICAEW Bannerman - audit report and auditors’ duty of care to third parties issued 23 May 2018

Report by Pat Sweet