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Your way, their way and no way

Auditors must be alert, to avoid inadvertently assuming a duty of care to a lender to a client. Hugh Morgan reminds auditors why.

There have been recent instances where lenders have sought to place additional obligations on the borrower, which directly or indirectly involve the auditor and potentially open up a duty of care to the lender. This is not a new issue. In 2000, due to demand from parties involved in financing arrangements, ICAEW published AAF 04/00 Firms’ Reports and Duties to Lenders in Connection with Loans and Other Facilities to Clients and Related Covenants. This guidance remains current and can be found, with other faculty Technical Releases.

It is important to note that firms are not obliged to accept an engagement to report in connection with a client’s statement of covenant compliance (Statement), despite what a loan agreement might say, since a firm cannot be bound to comply with the terms of an agreement to which it was not party. Nonetheless, many firms still wish to assist their clients.

AAF 04/00 advises firms to be alert to inadvertently assuming a duty of care to a lender in relation to their audit report. It is good practice for firms to obtain a full copy of their client’s loan agreement, rather than extracts relating to covenants, to determine the extent of any obligations that their client may have accepted on the auditor’s behalf. The guidance advises that there should be a separate engagement between the auditor, borrower and lender which is entirely separate from the audit work on annual financial statements.

A firm’s report in connection with the Statement will normally be confined to the accuracy of the extraction and computation of those financial matters that are the subject of covenants within the facility; it is essentially an agreed-upon procedures engagement rather than an assurance engagement.

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