No fee charged - why give something for nothing?
Readers of Audit & Beyond will be aware that clients and others will sometimes make varied demands for information from accountants. Auditors will have experience of making their working papers available to prospective purchasers of their audit clients or to successor auditors and answering questions about them.
It is not unusual for landlords or providers of finance to ask for confirmations or references from accountants before making a tenancy, or funds, available to a client. This can often arise when a client is looking at the possibility of a mortgage or charge over property. The financial standing of the client will be a key consideration for the lender, and accountants will frequently be asked to provide a reference.
Responding to these requests can be a risky activity, especially where the accountant is expected to make statements regarding a client’s future financial resources. This topic was discussed in the November edition of Audit & Beyond, which reminded readers of existing guidance and pointed out that where an accountant does provide a reference, ‘no fee should be charged’, resulting in something being provided by the accountant for nothing in return. Some readers have questioned this position, taking the view that it is not commercial or business-like for accountants to do anything for nothing. Can it ever be right to do something for nothing? Is it commercially sensible for the ICAEW ’s guidance to recommend that accountants provide confirmations or references about their clients without getting paid for doing so?
Charging fees for references
The article in November’s Audit & Beyond refers to the lender when it states that ‘no fee should be charged’. The position of the client is different. The comment on not charging picks up guidance in Technical Release Audit 2/01, Requests for references on clients’ financial status and their ability to service loans, which states in paragraph 9 that fees are not charged for references. It is important that accountants are clear about the implications of charging a fee to a lender requesting a reference (or to the client who is the subject of a reference).
Recommending that a fee is not charged to a lender to whom a reference is provided may seem contrary to commercial logic. But declining to charge a fee is a sensible precaution to safeguard against risk. ICAEW guidance on this topic has been consistent since Audit 2/01. The same approach is recommended in Audit 4/03, Access to working papers by investigating accountants (see paragraph 46) and AAF 01/08, Access to information by successor auditors (see paragraph 62).
In essence, where a party pays, it expects to get something in return. In the case of a written statement or commentary or reference provided by a professional, that something is a right to rely on what is provided. So if a fee is charged to a lender, a duty to the lender is likely to arise. The risk is that despite the denial of responsibility that may be contained in the reference, because of the fee, a court will find that the denial was not reasonable and is not enforceable. If a fee is charged but never paid, the denial might withstand challenge. The denial should be reasonable and enforceable if no fee is charged at all and nothing else is done that is inconsistent with the denial of any duty (such as entering into discussions with the lender and providing oral assurances).
As for the client, it is not appropriate to charge any client for any activity unless there is a product or service provided. In line with Tech 02/11, Managing the professional liability of accountants, all engagement activity should be documented in an agreed engagement contract.
If there is an engagement, it will be necessary to agree what work is to be performed, the nature of any resulting report, the fee to be paid, and so on. If there is no engagement but the accountant charges a fee to the client in respect of a reference sent to a lender, a duty of care to the client will arise in respect of the reference provided. Where that reference denies any responsibility to the lender, or is otherwise caveated to an extent that the reference does not meet the lender’s needs, the underlying transaction or context may not progress. The client might suffer or incur loss and then complain to the accountant, claiming that the accountant owed the client a duty to provide a reference that met the lender’s needs. The accountant will then be exposed.
Performing work for a reference
Some accountants might feel compelled to perform substantive work in respect of a client to enable a reference to be provided. An accountant in that position will manage risk more effectively by issuing an engagement letter, setting out the scope of work to be performed (which may take the form of agreed-upon procedures with a factual report on findings only). A fee will then be payable.
The form of report can be agreed and a basis for disclosing the report to the lender – if the lender is not the engaging party – can be documented, following the guidance in AAF 04/06, Assurance engagements: management of risk and liability. But this would probably be an unusual structure. More commonly the client will ask the accountant to provide a reference and to send it to the lender. Often the accountant might be tempted to decline, and Audit 2/01 recognises this in paragraph 9.
Charging actual costs incurred
For some references, accountants might need to retrieve information that has been stored or archived, to enable facts about the client to be checked. It might be seen as constructive to make copy documentation available. There may be a cost incurred in retrieving the information or making the copy. Charging for actual costs incurred with no profit element is discussed in AAF 01/08 (see paragraphs 60 to 63).
It may be possible to raise a charge, at the same time as denying a duty, if the charge relates to actual costs incurred in providing information. For example, if there is a copying cost incurred because a successor auditor asks for copy papers, or if there is a cost incurred in retrieving papers from external storage because the successor asks for access to papers that have been archived, then it may be reasonable to pass on the actual copying or retrieval costs, so that the predecessor does not have to suffer a cost in providing information. The same principles can be applied to an accountant providing a reference.
That does not mean that it will be reasonable to include a profit element or time costs, which is normally what is associated with a ‘fee’. If an accountant providing a reference does make a charge for such items, it is sensible to clarify the absence of any ‘fee’ or, if the charge is described as a ‘fee’, then it will help to clarify the absence of any profit element in the ‘fee’, and to state the basis for charging what is charged, so that the payer understands what it is paying for (actual costs incurred), and why (so that the accountant does not have to incur costs).
Some accountants might feel, in practice, that the costs actually incurred are minimal and that there is little point in preparing an invoice. But that is a separate issue that does not impact on the risks that arise if a ‘fee’ is charged without explanation, or if a ‘fee’ is charged and includes a time or profit element. Such a fee implies a service, a duty of care, and a right to rely and bring a claim.
Caveats and denials
A reference to any third party should always contain caveats and a denial of responsibility, in line with Audit 2/01. It is always open to accountants to indicate in a reference that they will be prepared to consider an engagement with the third party (such as a lender) to perform certain work on matters of special interest to the lender, if the lender wishes to obtain something on which it can rely. This provides the accountant with an opportunity to agree a scope and form of report and of course a fee and contractual protections. Appendix 1 to Audit 4/00, Firms’ reports and duties to lenders in connection with loans and other facilities to clients and related covenants, makes provision for this, in a different context.
References should always be treated with caution. They can give rise to unexpected liabilities for the provider. Charging a fee for a reference increases the accountant’s risk in a way that is beyond management: it leaves the accountant exposed. Providing guidance to this effect does not mean that ICAEW is not being commercial. On the contrary, such guidance demonstrates a proactive and sophisticated approach to managing risk and informs accountants of matters that might not otherwise occur to them. Accountants will have their eyes wide open to the possibility of pitfalls if they decide not to follow the guidance.
Christopher Arnull is a solicitor at KPMG and chaired the ICAEW working group on Managing the professional liability of accountants. The views expressed in this article are his own.
This article first appeared in the December 2011/January 2012 edition of Audit & Beyond, newsletter of the ICAEW Audit and Assurance Faculty.