The use of disclaimers that limit the duty of care to third parties by auditors in their auditor’s report has increased significantly over the years. Financial reporting standards expert Steve Collings investigates.
So-called ‘Bannerman’ paragraphs limiting the professional firm’s duty of care to third parties are now common in both auditors’ reports and other reports issued by accountancy firms.
The use of disclaimers in an auditor’s report was highlighted more recently in the case of Barclays Bank plc v Grant Thornton. Grant Thornton prepared non-statutory audit reports on Von Essen Hotels Limited Group (VEH) and expressed unqualified opinions for both 2006 and 2007. Barclays Bank alleged that the financial statements had been manipulated to show that VEH was capable of meeting bank covenants on its loan facility when, in fact, it could not. As a result, Barclays Bank suffered losses of some £45m when VEH went into administration in April 2011. The bank also stated that it relied on the unqualified opinions when making the loans to VEH.
Barclays claimed that Grant Thornton owed a duty of care to them and that this duty of care was breached because the auditors failed to uncover the alleged fraud. Barclays also said that Grant Thornton would have been aware that they would be placing reliance on the auditor’s report. Grant Thornton’s auditor’s report contained the Bannerman wording which set out that they did not accept or assume responsibility in respect of the reports to anyone other than the company and its directors.
The judge accepted Grant Thornton’s argument and struck out the claim. The judge stated that Barclays should have been aware of the Bannerman paragraph in the report – particularly as it was included in its first two paragraphs and, therefore, if Barclays Bank had not read it, then they should have.
The judge concluded that the Bannerman paragraph was reasonable having regard to the 1977 Unfair Contract Terms Act.
Placement of the Bannerman paragraph in the auditor’s report
The use of Bannerman continues to feature in auditors’ reports, although care needs to be taken if you are regulated by ACCA (see later).
As auditors will be aware, the structure of the auditor’s report has now changed in ISA (UK) 700 (Revised June 2016) Forming an Opinion and Reporting on Financial Statements which apply to audits of financial statements for periods commencing on or after 17 June 2016.
The changes brought about by ISA (UK) 700 are in the form of the structure of the auditor’s report itself – for example, the ‘opinion’ paragraph is the first paragraph of the report and there are additional requirements in respect of going concern and other information.
In May 2018, the ICAEW updated their guidance in the form of technical release 01/03AAF (Revised) The Audit Report and Auditors’ Duty of Care to Third Parties. Appendix 1 to the technical release positions the Bannerman paragraph at the end of the report, above the signature section of the auditor’s report and is worded as follows:
|Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Firms regulated by ACCA
Firms regulated by ACCA are required to have an understanding of Technical Factsheet 84 The use of Disclaimers in Audit Reports - in particular, paragraph 19 of technical factsheet 84, which discourages the use of disclaimers in the auditor’s report.
ACCA’s view is that standard disclaimers are not an appropriate or proportionate response to Bannerman and could devalue the auditor’s report. Indeed, ACCA states that where the audit is carried in accordance with the ISAs (UK), there would be no need to include a standard disclaimer in the auditor’s report.
The accountancy body’s view is that audit firms that conduct their work in accordance with the ISAs (UK) reduce the risk of a negligence claim being brought against them. Hence, it does not encourage the use of disclaimers such as the Bannerman paragraph. Disclaimers should only be included in justifiable situations and should not be used on a regular basis.
The use of disclaimers is common, both in audit and non-audit reports generated by professional firms. ICAEW encourages their use so as to manage the risk of liability to third parties, but this view is not shared by ACCA, which suggests that work done in accordance with the required standards does not need a blanket disclaimer.
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.