Auditors have been using a ‘Bannerman’ paragraph for over 15 years, intended to manage the risk of inadvertently assuming a duty of care to third parties in relation to their audit reports. But with changing standards on the reports themselves, how should Bannerman now be used? And is it even needed at all? 

As we begin the approach to the audit ‘busy season’, Helen MacNeill, a member of our in-house technical team, gives us a reminder of the ICAEW’s guidance. Issued in the summer of 2018, this guidance can be implemented with immediate effect.  

You can read the full original article in Accountancy Magazine, and in Croner-i Tax and Accounting.  


About the Bannerman paragraph 

If you’ve ever prepared or used audited financial statements, you’re likely to have seen a Bannerman paragraph: 

'Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.'

Since the revised UK auditing standards (ISAs) were issued in June 2016, however, there has been some confusion about how auditors should use the paragraph, and where they should place it in their reports. 


The old way

Before the June 2016 revisions to audit report layout and wording, Bannerman was included in the first or second paragraph of the audit report. 

However, this isn’t possible for an audit report prepared under ISA (UK) 700 (Revised June 2016) Forming an opinion and reporting on financial statements. The new ISA requires a strict layout: the opinion paragraph must be first, and the basis for opinion must immediately follow. 

As the previous Bannerman guidance didn’t fit with the revised standards, auditors were left to do as they wished. Meanwhile, debate ran riot amongst regulators, standard setters, and professional bodies.  


So where should it go?

To finally clarify the position, the ICAEW issued a revised Technical Release 01/03AAF The audit report and auditors’ duty of care to third parties (Tech 01/03AAF) in May 2018. 

Their recommendation, on advice from Leading Counsel, is that auditors who wish to manage the risk of liability to third parties should use a disclaimer – and they should place it as the final section of the audit report, directly preceding the auditor’s signature. 


Is Bannerman still necessary?

The ICAEW suggests using the paragraph – but on the other hand, ACCA’s council doesn’t encourage including standard disclaimer clauses in audit reports. It accepts that members may wish to make specific disclaimers of responsibility in appropriate, defined circumstances – but it doesn’t encourage their use on a regular basis.

ACCA also does not believe that, where an audit is properly carried out, such clauses are even necessary to protect auditors’ interests. 


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