Auditors breathed a collective sigh of relief last month when the High Court upheld the standard disclaimer wording in audit reports under which auditors exclude liability to anyone other than the audited company.
The case related to financial statements prepared by Grant Thornton in relation to the Von Essen Hotels group. There was no statutory requirement for the group to prepare consolidated financial statements as it was actually part of a larger corporate group and therefore would be included in consolidated accounts of the ultimate holding company. However, the group had entered into a facility agreement with Barclays under which it was obliged to provide the bank with audited consolidated financial statements for Von Essen Hotels Limited (VEH) and its subsidiaries. VEH engaged its auditors, Grant Thornton, to prepare the required accounts so it could comply with the obligation under the facility agreement.
The financial statements contained a non-statutory report from Grant Thornton based on the standard wording issued by the Institute of Chartered Accountants in England and Wales (ICAEW). In the first two paragraphs of that report Grant Thornton excluded ‘responsibility to anyone other than the company and the company’s director’ for their audit work. The audit reports also stated that the financial statements had been prepared ‘in order to assist you to fulfil your duties under the terms of your loan facility’.
When the VEH group went into administration it was discovered that VEH’s finance director had deliberately manipulated its financial records in order to make it appear that the company was meeting the covenants in the facility agreement. Barclays claimed that Grant Thornton owed it a duty of care in relation to the non-statutory audit reports as those reports were issued in order to provide information to Barclays as VEH’s funders. Grant Thornton pointed to the disclaimer wording to argue that it had excluded liability to anyone other than the company (and its sole director).
And accountants around the country held their breath, waiting to see if their standard disclaimer would hold fast…
The judge said that it was clear from the wording in the reports that Grant Thornton anticipated they would be sent to Barclays. So it was arguable that, without the disclaimer, a duty of care would exist between Grant Thornton and Barclays. The key question, therefore, was whether the disclaimer was reasonable?
In this case, a number of factors influenced the court in reaching the decision that yes, the disclaimer was reasonable:
- Barclays was a sophisticated commercial party, used to reading accounts and audit reports;
- the disclaimer was clear and obvious on the face of the reports and therefore Barclays should have been aware of it; and
- Barclays did not engage Grant Thornton directly to prepare the required financial statements although it had previously engaged them to carry out a review of the VEH group’s affairs. Taking such a step would have protected Barclays’ position but it had chosen not to do that.
The reports made it clear that Barclays relied on them at its own risk and therefore Grant Thornton could not be liable for any loss suffered as a result of that reliance.
This case is believed to be the first time the ICAEW standard disclaimer wording (known as a ‘Bannerman clause’) has been considered by the courts. No doubt everyone on the audit side of the fence is relieved that the wording has withstood judicial scrutiny.