Auditors fear legal attacks in plans to ‘simplify’ reports


Auditors could be left open to legal action from all sides in the event of a
major audit failure, under plans to review the auditor’s report.

The Auditing Practices Board is looking again at so-called ‘third party’
liability clauses in the audit report, and considering proposals to remove a
crucial defence against litigation.

The ‘Bannerman’ statement, which auditors use to discourage third parties
from relying on the audit, and so pursuing legal claims, has been flagged by the
APB for reconsideration as part of a broader review of the auditor’s report.

This move is set to cause consternation among the firms, which have only
recently won the ability to limit their audit liability.

Jon Grant, APB board member, told Accountancy Age: ‘As part of [an initiative
to remove boiler-plate wording in audit reports], the APB suggests it might be
timely to reconsider the need for the Bannerman statement.’

Audits are primarily carried out for investors and the Bannerman judgment in
2003 limited the scope of who else could rely on the audit statement.

Lawyers cited the Freightliner case as one that might have concluded
differently without the clause. German truckmaker MAN successfully sued
Freightliner for £350m for a hidden fraud at a subsidiary it had bought, but
Ernst & Young, which had audited the subsidiary, was not held liable in
subsequent action.

The move would also remove a barrier to other actions, from groups, like the
Farepak savers for instance, or possibly bank lenders.

Herbert Smith partner Hardeep Nahal said there might still be barriers to
such claims: ‘To establish whether auditors did assume such responsibility, the
claimants must show that the auditor knew that the report was going to be relied
on for a particular purpose, by a particular party.’

Liability limitation could also become unclear, he added: ‘While the
Companies Act addresses liability to an auditor’s clients, it is not yet clear
whether the auditors could invoke this to limit action from third parties.’

The firms are likely to dig their heels in to keep the clause.

KPMG’s head of audit Richard Bennison said it was unlikely that auditors
would want to see the disclaimer removed.

‘I think having fought long and hard for it, it will take a lot for it to
disappear. It has been used to help protect auditors against potential
litigation. It’s unlikely it will get removed,’ he said.

Related reading