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 sue.

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?

Entity-Specific Information

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 consent.

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 difficult issues.

Voluntary Auditor Commentary for non-Public Interest Entities (PIEs)

One suggestion under consideration is to leave to the individual auditor the discretion to add Auditor Commentary in some circumstances.

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?

Clarity

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.