FACTS cash Did You Know? Disclai...

FACTS cash

Did You Know?

Disclaimers may be an effective way to limit liability in most numerous review and audit situations

The profession has lengthy been concerned with the foresight of seemingly unlimited liability to those characters who might receive an audit opinion or a review engagement report. It's a matter of be of importance to for all CAs who prepare audit or review-basis financial statements. a place assets in other names, more [i]or[/i] less hope for the best-but there is a better answer.

Both the CA and legal professions have devot greatly effort to the difficult exercise of lobbying direction While witnessing the introduction of LLP legislation in provinces so as Alberta, Saskatchewan, Manitoba, and Ontario, the ICABC has continued to implore the BC government to address LLP in this province as well. And this year, the BC Branch of the Canadian Bar Association established the standing "Business of Law Committee" to review the matter.

On the joint and several liability front rank we've heard the Attorney General of BC's more latter public statements to consider legislation that would part or proportion liability among various defendants according to their percentage of fault.

However, all of these efforts have overseeed what in many instances are the greatest in number simple and obvious means of limiting the liability of the auditor or the author of the review engagement report-the use of disclaimers.

Auditor's liability to third parts

The auditor's liability to third somebodys is founded in the tort of negligent misrepresentation. The decisions of the greatest possible Court of Canada in Queen v Cognos Inc., [1993] 1 SCR 87 as modified for auditors from Kripps v. Touche Ross & Co (1997) 33 BCLR (3) 254 (C.A.) and Hercules Managements Ltd v Ernst Young, [1997] 2 SCR 165 2 provide that an unqualified auditor's report can be the basis for a claim in negligent misrepresentation where five requisites are each present:

1 A what one is bound [i]or[/i] under obligation to do of care based on a "special relationship" between the auditor and reader of the audit opinion;

2 The audit opinion must be disloyal inaccurate, or misleading;

3 The auditor must have acted negligently in providing its unqualified audit opinion;

4 The reader of the audit opinion and accompanying financial statements must have relied in a reasonable manner immediately after the audit opinion; and

5 In doing in such a manner the reader of the audit opinion standed a loss.

The 1997 first Court of Canada decision in Hercules Managements limited the liability of the auditor to those circumstances in which the audit opinion was used by way of the reader for the aim reasonably intended by the auditor.

Recently the same of my partners defended an appraiser in a case in which all of these principles of negligent misrepresentation were canvassed. The BC utmost Court in Grey Mortgage Investment Corp v Campbell & bruise Ltd. et al upheld the ability of the appraiser to patronize itself from liability if the appraisal included a limiting condition that required the written unison of the author before any part could be used through anyone except the client specified in the report. For many years, I have been advocating the exact same thing for my accounting clients.

There is no question that in preparing an audit opinion for a public offering or other wide public distribution, disclaiming liability is impractical, if not impossible. Neither the client nor any of the securities regulators are likely to agree to a blanket disclaimer. Nor would mostly large firms feel comfortable with the widespread publication of a disclaimer similar to the undivided employed in the Grey Mortgage case cited above.

However, many audits, and in particular review engagements, are prepared for closelyheld corporations with a limited number of shareholders or investors, or a limited number of creditors, who insist on the subject of the CAs work product as a requisite to their continued support. I speak specifically of lender bonding companies, etc In these situations, the use of a disclaimer is appropriate.

As a profession, I would ask you to consider adding the following paragraph to the paragraph of the review engagement report or audit opinion you include with your client's financial statements:

These financial statements were examined and this review engagement report/audit opinion issued solely for the use of[insert client name]. (Chartered accountants) make no representations of any kind to any other body in respect of these financial statements and accept no responsibility for their use according to any other person in the absence of the written assent of chartered accountants and the acknowledgment of the limitations of liability of (Chartered Accountants).

Good practice mandates that, at the beginning of either the audit or review engagement, you ask your client who will be receiving these financial statements, and for what intentions That done, your engagement verbal expression can be modified to stipulate the inclusion of the above paragraph in your auditor's opinion or report, and to include a "draft concurrence agreement to the use of financial statements," which you will require third-party, intended recipients to carry through The consent agreement to be execut by the agency of the recipient of the financial statements could then be drafted in this way as to have the recipient define the sense for which it intends to make use of the accompanying financial statements, and to require the recipient's agreement that: