The International Auditing and Assurance Standards Board
(IAASB) issued in June an Invitation to Comment on proposed changes
to the standard auditors' report, available here. The deadline for comments is 8 October
2012. Appreciating that many different considerations are relevant,
we have identified the following ways in which the proposed changes
might affect the legal liability landscape.
Scope of Duty of Care
The call for change focuses on the myriad users of financial
statements. One proposal would require the auditor to add
information to his report which is "...likely to be most
important to users' understanding of the audited financial
statements or the audit". This information would be included
as "Auditor's Commentary".
It is generally recognized that the widespread use of financial
statements, for numerous purposes, crates significant indeterminacy
with respect to the auditor's legal liability. This has led to
limitations on the duty of care, such that in many jurisdictions,
only identifiable sub-classes of foreseeable users are entitled to
In determining which users' understanding should be
considered and what information would be important to them for
purposes of "Auditor's Commentary", will the auditor
create working papers which might eventually expand his duty of
care? For example, in numerous jurisdictions, statutory audit
reports are now considered to be prepared for stewardship purposes
and the duty of care is circumscribed by that use, in the absence
of evidence as to another known purpose. Will it be argued that in
the process of developing Auditor's Commentary, the auditor has
accepted a duty of care to other users for other purposes?
The IAASB recognizes that it is the remit of those charged with
governance (TCWG), not the auditor, to provide original information
about the entity. It is further noted that auditors in many
jurisdictions are prohibited by their rules of ethics from
revealing any client-specific information without client
In addition to these serious impediments to such disclosures, it
is worth considering the possible "chilling" effect on
full and frank communication between the financial statement
preparer and the auditor before permitting or requiring the auditor
to provide such original information. For example, reporting on
contentious or difficult matters encountered during the audit may
discourage the presentation by the preparer to the auditor of these
Voluntary Auditor Commentary for non-Public Interest
One suggestion under consideration is to leave to the individual
auditor the discretion to add Auditor Commentary in some
Will this put an auditor between the proverbial rock and a hard
place? If the client does not want the Comments to be inserted,
will he threaten to sue? If the auditor complies with his
client's wishes, will it be suggested later that this was
somehow indicative of a failure to stand up to his client?
Many of the proposed changes are suggested in order to improve
clarity. Any change that achieves that goal will assist in
narrowing and perhaps even avoiding legal debates. In particular,
misconceptions as to the differing roles of the financial statement
preparer, TCWG and the auditors lead to significant costs in legal
disputes and the uncertainty of their outcomes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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