FRC discussion on role of auditors in preliminary announcements
The Financial Reporting Council (FRC) has initiated a discussion on the role auditors currently play when a publicly-traded company compiles and publishes preliminary results announcements. It also puts forward several suggestions for improving the process.
A preliminary announcement is one in which a publicly-traded company issues its financial results before publishing its final statutory year-end accounts. Neither listed companies (e.g. LSE Main Market companies) nor AIM companies are required to announce preliminary results, but they normally do so.
Before a Main Market company can publish preliminary results, it must obtain its auditor's agreement to the proposed announcement. (AIM companies are not subject to this requirement.) However, there is no need to obtain an auditor's report on preliminary results, nor for the auditor to sign off on the final year-end accounts before preliminary results are published.
The FRC has issued guidance for auditors who are asked to engage with the announcement of a company's preliminary results in the form of Bulletin 2008/9, which can be found through the FRC's bulletins webpage here. This bulletin represents "best practice", rather than an auditing standard that auditors are required to follow.
The FRC has found that the majority of Main Market and AIM companies do obtain auditor sign-off for their year-end accounts before publishing preliminary results and, in some cases, delay a preliminary announcement until they receive sign-off. As a consequence, the FRC notes, people may be relying on preliminary results but will not see the information in the auditor's report until some time later.
The FRC has put forward various suggestions for consideration to attempt to harmonise the involvement of auditors in preliminary results announcements. These include:
- converting Bulletin 2008/09 into a standard that auditors would be required to follow;
- requiring auditors to follow FRC guidance when agreeing to preliminary announcements;
- extending FRC guidance to situations where auditors voluntarily agree to review preliminary results announcements (i.e. announcements by AIM companies);
- requiring a company's audit to be complete and its auditor's report signed before the auditor will consent to the announcement of preliminary results;
- requiring a form of auditor's report (but not the full auditor's report on the year-end accounts) to be published alongside the preliminary results announcement; and
- encouraging or requiring auditors to assess whether a preliminary results announcement is "fair, balanced and understandable" (the standard in the UK Corporate Governance Code).
The discussion paper can be found here. The FRC has requested comments by 23 June 2017.
Friend who performed services assumed a duty of care
In Lejonvarn v Burgess and another, the Court of Appeal held that a person who undertook to provide services to her friends did so on a "professional basis" and so assumed a duty of care to them.
Mrs Lejonvarn was an architect and friend of Mr and Mrs Burgess. She had previously worked at firms that had provided project management and design services to Mr Burgess' company.
The Burgesses wished to re-landscape their garden. They obtained a quote, but Mrs Lejonvarn told them she would be able to manage the project more cost-efficiently. The Burgesses chose to use Mrs Lejonvarn for the work. The parties never concluded a contract for the services, but construction work began, which Mrs Lejonvarn supervised.
Ultimately, the project costs overran and the quality of the work was not to the Burgesses' satisfaction. The Burgesses claimed against Mrs Lejonvarn for damages, alleging that, even though no contract had been concluded, Mrs Lejonvarn had assumed a duty of care and had not fulfilled that duty.
What did the courts say?
At first instance, the court agreed that Mrs Lejonvarn had assumed a duty of care to the Burgesses. The judge found that Mrs Lejonvarn had been operating in a "professional context", rather than a social one. In this regard, he said that the previous arrangements between the parties and their companies provided relevant context, as did the fact that the Burgesses had historically extended courtesies to Mrs Lejonvarn beyond the normal bounds of friendship.
Mrs Lejonvarn appealed against this decision, but the Court of Appeal agreed with the first instance judge. The Court held that Mrs Lejonvarn had assumed responsibility for overseeing the project and, to that end, had provided services to the Burgesses.
The Court emphasised two important points. First, the fact that the parties had not concluded a formal contract did not alter the Court's view, nor did the fact that Mrs Lejonvarn was to receive no payment for the initial stage of the project. It was enough that the scope of the services for which Mrs Lejonvarn assumed responsibility was clear and identifiable.
Second, the Court was at pains to clarify that, to the extent Mrs Lejonvarn performed any services, she was under a duty to do so with reasonable care and skill. However, she was not under a positive duty to provide those services. That would have required a contract between the parties. In other words, where Mrs Lejonvarn performed services without reasonable care and skill, the Burgesses would have a claim against her, but they would not have a claim if she simply failed to provide the services.
Although the facts of this case are specific, the principle set out in the judgment can easily translate to a commercial context. It is not uncommon for individuals with professional expertise to lend assistance to colleagues, friends and family, whether by way of advice or by undertaking concrete tasks. Similarly, businesses often provide gratuitous services to current or potential clients in order to win business or improve their customer relationships.
The judgment underscores the need for care when doing this. In particular, individuals and businesses alike should not assume that they will not incur potential liability merely because they provide advice or services for free or outside a business context. The key question will be whether they are using their professional expertise and the person they are assisting is relying on this.
- The Criminal Finances Act 2017 was given Royal Assent on 27 April 2017. The Act introduces the new corporate offence of failing to prevent tax evasion. Our Tax and Structuring team have prepared a note on this new offence, which can be found here.
- The new gender pay gap reporting regime has now come into effect, with the first employers now publishing their data on the Government's new gender pay gap data website. Our Employment team has prepared a note on the new regime, which can be found here.
- In our update for the week ending 24 March 2017, we reported that the BEIS Committee had launched an inquiry into business scale-ups. The Committee has now decided to close that inquiry pending the General Election in June this year.