The Business Law Committee has recently been considering the practice in relation to solicitors responding to routine audit queries. In light of the increased requests to reply to audit queries which are not in the form as agreed between Chartered Accountants Ireland, the Law Society of Ireland and the Law Society of Northern Ireland (“non standard audit letter”) the Committee has decided to issue guidance to members with respect to certain aspects of the responses to non standard audit letters as set out below. This guidance is advisory and non-binding and members should not consider themselves required to depart from their own risk management procedures with respect to audit letters and their responses. Solicitors are advised to pay particular attention to their responses in the case of non standard audit letter. Insofar as a solicitor is requested to address an audit query by means of an online portal the considerations mentioned below will nevertheless apply and solicitors should have regard to any terms and conditions which are accepted and in case of doubt may wish to provide a written response in preference.
The aspects which the Committee thought merited specific mention are:
1. Non standard audit letters
Attached as Appendix 1 is the approved form audit letter which was agreed between Chartered Accountants Ireland, the Law Society of Ireland and the Law Society of Northern Ireland. Although not usually specifically agreed in relevant terms of engagement, there is nevertheless a reasonable expectation among most clients that solicitors will reply to this letter in a reasonably timely manner having regard to the fact that this letter forms an important part of the audit checking process.
Where a non standard audit letter is provided, no such expectation is reasonable by default and solicitors should exercise their judgment as to the manner in which they might reply, but the Committee recommends that the following matters might be addressed in the reply:
- The reply is subject to the relevant terms of engagement
- Any estimates given or accepted are given or accepted on the basis that the solicitor will not incur any liability for any loss or damage which may be suffered by any person by reason of any such estimates being incorrect. Any estimates of costs incurred are given without commitment to the amounts estimated
Where commentary is requested about a specific matter or possible exposure, and where the solicitor agrees to provide such commentary, the client’s instructions to do so should be confirmed and the solicitor should have regard to issues such as privilege, confidentiality and the potential impact which any commentary might have on the conduct of the matter.
A sample form of letter that might accompany a reply to a non standard audit letter is attached at Appendix 2.
2. Estimates of liabilities
It is expected, where no matter is specified in Schedule 1 in relation to an approved form audit letter, that the proper response is “No matter specified”. It is not for the solicitor to identify matters that might give rise to a liability.
Where an estimate is given as to a potential liability in relation to a specified matter, either in relation to an approved form audit letter or otherwise, it is important that any appropriate caveats to which this is subject are specified in a covering letter (e.g. the estimate is preliminary in nature only or no inquiry / discovery has been made with respect to this matter and accordingly any estimate of liability is subject to change as further information about the matter becomes available). It is also prudent to ask whether any reflection of the estimate will be made available in any publicly filed accounts in case this has a bearing on conduct of the matter.
3. Groups of companies and engagement letters
It is not uncommon for audit letters to refer to groups of companies. It is for the solicitor to check that he has an engagement with the relevant companies and to ensure that his engagement letter extends to providing services to related companies but also to ensure that his agreed limitation of liability extends to the audit confirmation letters to all relevant companies.
4. Title documents
It has become common for confirmations to be sought as to possession of title documents. Where such a confirmation is sought, the solicitor should take care to ensure that no confirmation as to quality of title or other statement which is capable of creating reliance in relation to title matters should be included in any reply to an auditor’s query without specific instructions to conduct appropriate title verification and steps and subject to the usual caveats.
Accordingly, a suitable disclaimer should be included in any confirmation regarding possession of title documents, such as “While we confirm that we have custody of documents which [relate to [the property]] or [are represented to us to relate to [the property], we give no assurance or confirmation as to whether or not those documents represent or comprise good or marketable title to [the property].