References on clients’ financial status

Accountants are often asked for references on their clients’ financial status by potential lenders. This helpsheet has been issued by ICAEW’s Technical Advisory Service to identify the key considerations members must be aware of before responding to such reference requests. 

Members may also wish to refer to the following related guidance:

• AUDIT 2/01 Requests for references on clients’ financial status and their ability to service loans
• AUDIT 4/00 Firms’ reports and duties to lenders in connection with loans and other facilities to clients and related covenants

Although practitioners will have a desire to assist their clients, care must be exercised to avoid creating a duty of care which could lead to a liability to a lender should things go wrong.

Confidentiality

Members are reminded that they are bound by the fundamental principle of confidentiality contained in the ICAEW Code of Ethics. Section 114 of the code provides further details, however members should obtain the consent of the client prior to responding to any reference request.

Responding to a request received

Many lenders request accountants to complete detailed questionnaires, confirmations and/or make sweeping statements in responding to requests for references on clients’ financial status. Members should take particular care in responding to such requests as they are unlikely to be in a position to be able to certify the solvency of a business or confirm whether a client will be able to service a loan in future, for example, as it is, after all, almost impossible to predict events so far into the future. Members are strongly advised, therefore, to ensure that they comment only on questions of fact.

Members should follow the guidance in AUDIT 2/01 Requests for references on clients’ financial status and their ability to service loans and are advised to base any responses on the example provided within this document in order to minimise potential liability.

Where requests are received for copies of draft accounts or other such documents, members would be advised not to provide these directly to the bank, as an inadvertent duty of care may arise. Any draft accounts should be clearly labelled as such.

Separate engagements to provide specific assurances to lenders

Members should also take particular care to consider liability to lenders where they are engaged to provide specific assurances to them and should not agree to terms they consider inappropriate. Members are advised to consult with their insurer where appropriate.

Potential lenders may seek to place reliance on reports issued by accountants on the financial statements of their clients. It is therefore important that accountants ensure that appropriate disclaimers are included within such reports to seek to reduce potential liability.

Accountants’ reports

Lenders may seek to place reliance upon accountants’ reports included in the financial statements (compilation reports) of both incorporated and unincorporated entities. Members should consult TECH 07/16 AAF Chartered Accountants’ reports on the compilation of financial information of incorporated entities or TECH 08/16 AAF Chartered Accountants’ reports on the compilation of financial information of unincorporated entities, as appropriate, for example wording to be used in such reports which include disclaimers that are designed to discourage third parties relying upon them.

Assurance reports

Where unaudited financial statements are subject to an assurance review in accordance with TECH 09/13 AAF The ICAEW Assurance review engagements on historically financial statements, members are advised to use the example reports contained within the technical release which include appropriate disclaimers.

Audit reports

Potential lenders often rely upon audit reports when making lending decisions. When drafting audit reports, auditors should have regard to TECH 01/03 AAF (Revised) The audit report and auditors’ duty of care to third parties which recommends the use of the Bannerman paragraph to aid in limiting the auditor’s liability.

Further guidance on limiting liability to lenders is available in AUDIT 4/00 Firms’ reports and duties to lenders in connection with loans and other facilities to clients and related covenants.

More general guidance on how professional accountants can limit their liability is contained within TECH 09/15 BL Managing the professional liability of accountants.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.