PracticeAccounting FirmsBig Four limit audit liability

Big Four limit audit liability

A second Big Four firm has moved to protect itself from third party liability claims by adding a new disclaimer to its audit reports.

Link: Rivals to follow PwC on audit liability disclaimer

Ernst & Young’s decision follows a surprise move by PricewaterhouseCoopers to go it alone in December ahead of any guidance from the ICAEW. E&Y told Accountancy Age on Monday the firm had ‘added a disclaimer which follows the principles of PwC’s, but not the exact wording’.

A spokesman said: ‘We’re using it in our audit opinions as we speak.’

In a delayed reaction, on Tuesday the institute published its guidance on auditors’ duty of care to third parties. The guidance states: ‘The purpose of this clarification language is to reduce the scope for the assumption of responsibilities to third parties’.

Following the publication of the guidance, KPMG and Deloitte & Touche confirmed they would also add a disclaimer to their audit reports.

John Connolly, UK senior partner at Deloitte, said: ‘We’re coming into line with the ICAEW position given the strong direction of leading counsel.’

Deloitte said it would be applying the additional disclaimer to companies with 31 December 2002 year ends. The firm audits Alliance UniChem, BAA and Compass, among other FTSE-100 companies.

Jonathan Davies, professional liability partner at law firm Reynolds Porter Chamberlain, said: ‘The legal position between the auditors and clients is unaffected. Whether this process will affect banks’ decision to lend, only time will tell.

‘One would have to look at the precise terminology to see if it affects other creditors.’

The decision to include a disclaimer was prompted by a case in July where the Royal Bank of Scotland sued Glasgow auditor Bannerman Johnstone Maclay to reclaim a lost loan, which it said it had offered based on information included in the audited accounts.

The judge found in favour of RBS although the case is going through the appeal procedure currently.

E&Y audit client Exel, the rail and freight giant, said: ‘I don’t think it causes us a problem. It clarifies what auditors have always thought was their legal position.’

Andrew Ratcliffe, chairman of the ICAEW’s audit and assurance faculty, dismissed any allegations that the audit report’s value was being watered down. ‘The value of an audit is undiminished by this new guidance,’ he said. ‘Auditors still have exactly the same responsibility for their audit reports to the shareholders as a body as they always had. ‘This guidance will be of practical help for members and also helpful to users of financial statements by clarifying the auditor’s responsibilities.’

The Auditing Practices Board said it would not be updating its rules on what should be contained in an audit report. Instead the board said it would contribute to updating international auditing standards which are expected to take effect in the UK in 2005. A draft rule is due out towards the end of this year.

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