Accounting firms in Britain, including PricewaterhouseCoopers and Ernst & Young, have begun adding disclaimers to their audit letters saying that no one but the shareholders of the audited company may hold the auditors responsible for the accuracy of the figures.
The disclaimers have not been tested in court, and it is not clear how they affect American shareholders. Many British corporations file financial reports to the Securities and Exchange Commission in the United States, and some directors of those companies say they are concerned that their shareholders might find their rights restricted by the language of the new audit letter.
A spokesman for the commission said, “We're aware of the issue and are considering the implications.”
For lenders, bondholders, prospective investors and even employees of British companies, the message is much clearer: You cannot rely on audited reports.
The British accountants are adopting versions of a provision drafted by the Institute of Chartered Accountants, the British self-regulatory and trade organization. The institute proposed that auditors clearly state that their opinions are addressed “solely to the company's members, as a body,” and that the auditors “do not accept or assume responsibility to anyone other than the company and the company's members as a body.”
According to Peter Wyman, president of the institute, the disclaimers follow a recent court decision. A judge held that an auditor was liable when a lender suffered losses after relying on audited financial statements that proved inaccurate. The case is being appealed, Mr. Wyman said, but in any case the new language in the audit letters was intended to clarify existing British law, not change it.
“It's not designed to restrict any further the duty of care, it's simply to stop it accidentally from being widened,” Mr. Wyman said.
Whether any accounting firms will try to add similar disclaimers to their opinion letters in the United States remains to be seen. But several lawyers said that efforts to limit liability, if not carefully written, would very likely fail in a United States court because contract language cannot override provisions of federal securities laws.
“If you wrote a disclaimer that basically says we're not liable for fraud or making a misstatement in connection with this opinion that we're putting out, that would be ineffective as a matter of law,” said Michael A. Perino, who teaches securities law at St. John's University in New York. If such a disclaimer is valid in Britain, then accountants may have broader liability in the United States, he said.
David Nestor, a spokesman for PricewaterhouseCoopers, said the firm did not have any plans to add the language to its opinion letters for United States public companies. “We understand that there are discussions under way with the S.E.C.” about how PricewaterhouseCoopers's British arm could use the disclaimers to protect itself while still complying with American securities law, Mr. Nestor said.