Liability Implications Of IAASB Proposed Changes To The Auditor's Report

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...