Access to Working Papers by Investigating Accountants. technical release AUDIT 04/03

Transcription

1 technical release Access to Working Papers by Investigating Accountants AUDIT 04/03 This guidance has been issued by the Audit and Assurance Faculty of the Institute of Chartered Accountants in England and Wales in October 2003 to assist auditors in managing their risk when permitting access to their audit working papers. It replaces Audit 3/95, Access to Working Papers by Investigating Accountants, which was the Faculty s previous guidance in this area. The guidance does not constitute an auditing standard. Professional judgement should be used in its application. Contents Paragraph Numbers Preface Introduction 1 2 Background 3 4 Facilitating access 5 6 Managing duty of care 7 11 Information or explanations additional to the working papers Content of the authorisation letters Content of the release letters Other parties who will have access to information derived from the audit working papers (A) Syndicated financings (B) Flotations (C) Vendor due diligence (D) Business refinancing where there is no acquisition 43 Investigating accountants from the same firm as the auditors Consideration Conclusion 49 Appendices Page Numbers 1) Specimen client authorisation letter ) Specimen release letter To Prospective Purchaser and Investigating Accountants No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this Technical Release can be accepted by the Institute.

2 Preface The Institute first issued guidance on access to working papers by investigating accountants (Audit 3/95) in October That guidance and its example letters provided a useful and effective framework under which auditors could manage the potential risks of assuming duties of care to third parties whilst facilitating corporate transactions. However, the complexity of transaction funding, coupled with the emergence of different approaches such as vendor due diligence, has resulted in an increase in the number and diversity of parties that may seek to gain access to audit working papers. The variety of such situations can lead to considerable practical difficulties for all parties in applying the guidance. As a result, a number of different approaches have developed and there is market inconsistency in the implementation of the guidance. Accordingly the Institute has reviewed and updated the original Technical Release. This new guidance provides more emphasis on and explanation of the risks associated with the variety of situations which auditors may come across when requested to provide access to working papers. The basic principles in relation to providing access to auditors working papers are still the same. The working papers are the auditors legal property and they can restrict or decline access to them. Where access is permitted, it is not provided until: an authorisation letter is obtained from the vendor and target company authorising the auditors to provide such access; and a release letter is signed by the prospective purchaser and its investigating accountants agreeing, amongst other things, that auditors do not assume any duty or liabilities as a result of permitting the access. The main area of change in the release letter is in relation to the indemnity sought by the auditors, which is now an indemnity against loss caused by the breach by the purchasers or the investigating accountants of the terms of the letter. In addition, it is now recommended that auditors include a disclaimer notice with the working papers and require such a notice to be attached to the investigating accountants due diligence report. Although the example letters envisage a simple transaction where one corporate entity purchases another, the guidance also provides more emphasis on the risks associated with the variety of situations that exist in the current market place which auditors may come across when requested to provide access to working papers. The Institute has also taken the advice of Leading Counsel. The guidance in this Technical Release is based on the advice the Institute has received. The approach laid out in the Technical Release has been reviewed by the British Venture Capital Association (BVCA) which makes the following comment: In connection with the preparation of this Technical Release, the Institute received and considered representations made on behalf of the BVCA concerning Appendix 2 of Technical Release 3/95. A number of amendments to Appendix 2 of Technical Release 3/95 contained in this Technical Release reflect certain of those representations. The review of the Technical Release was initiated by the Institute s Corporate Finance Faculty which makes the following comments: The Corporate Finance Faculty was keen to initiate a review of the guidance set out in Technical Release 3/95. The Faculty s purpose was to deterimine whether the guidance could be expanded to address a broader range of transactional activities and whether any amendments might enhance the efficiency of transactions whilst continuing to afford appropriate protection to auditors. The Faculty is pleased to have been involved in the review and has made representations on the guidance to the Audit & Assurance Faculty during the course of the review. For the guidance to be useful and effective, it is essential that all practitioners involved in the process apply it consistently and with minimal change. Auditors are also reminded to take account of the separate guidance already issued by the Institute which covers the risks of taking on responsibilities to third parties with regard to their audit reports, for example in Audit 4/00 ( Firms reports and duties to lenders in connection with loans and other facilities to clients and related covenants ), Audit 1/01 ( Reporting to third parties ) and Audit 01/03 ( The audit report and auditors duty of care to third parties ). 1

3 Introduction 1. During certain investment and lending transactions, potential purchasers, investors and lenders (referred to below as purchasers ) or their agents instruct investigating accountants to investigate and report on aspects of the affairs of the target company. As part of this investigation, investigating accountants may request access to the audit working papers of the target company s auditors. 2. Prior to allowing access to the audit working papers, the auditors of the target company will want to consider such issues as ownership of the audit working papers and confidentiality as well as whether such access might create an additional duty of care. This guidance note is intended to assist auditors in relation to the issues they must consider when deciding if and how any audit working papers are released. Background 3. The working papers of auditors are their legal property and they have the right to restrict or decline access to them. Furthermore, by permitting investigating accountants to review the auditors working papers, the auditors risk creating a duty of care to the purchaser and the investigating accountants in relation to those working papers. In addition, the working papers may contain confidential information. 4. However, refusing access is unhelpful to the auditors clients, vendors and purchasers. If the auditors are prepared to permit access to their working papers, the issues referred to below will have to be addressed to the auditors satisfaction. Facilitating access 5. Auditors do not expect to provide access to their audit working papers or provide information or explanations in relation to those papers until they have obtained: (a) (b) An authorisation letter signed by the vendor and the target company authorising the auditors to permit access to the audit working papers and provide explanations of them where appropriate as well as agreeing that the auditors will have no liability to the vendor, the target company or their respective directors as a result of providing access to the audit working papers or providing information or explanations. An example of an authorisation letter is given in Appendix 1; and A release letter signed by the prospective purchaser and its investigating accountants in which the purchaser and the investigating accountants agree that the auditors do not assume any duties or liabilities as a result of permitting access or providing information or explanations and the purchaser agrees to indemnify the auditors against claims arising out of breach of the release letter by the purchaser or the investigating accountants. The release letter will also require the purchaser and the investigating accountants to include a standard notice on the due diligence report bringing out the point that the auditors do not accept any liability in relation to the grant of access or provision of information or explanations. An example of a release letter is given in Appendix The request may also extend to papers concerning dealings with the Inland Revenue (taxation papers). In this case, the authorisation and release letters should also specifically cover these papers. Firms will need to consider whether access is also provided to working papers relating to returns and computations. Accordingly, the guidance which follows applies equally to the tax working papers. In addition, where the audit was conducted for purposes other than normal statutory requirements under the Companies Acts, the letters should be appropriately tailored. Managing duty of care 7. In managing the risks associated with giving access to working papers, this guidance proposes three cumulative risk management steps: 1) Limiting the circumstances in which a duty of care by the auditors may be said to arise; 2) Excluding any duty that might otherwise arise; and 3) Seeking an indemnity to protect against any claims that are made against the auditors arising from failure to comply with the release letter. These are expanded upon in turn below. 8. A significant protection for the auditors is achieved by obtaining a written acknowledgement that no duty of care is owed. In addition it is important to explain in summary the more important characteristics of the audit working papers. In very broad terms such characteristics include: what the working papers are (and what they are not), what an audit is, and that the working papers were not created for the purpose of the transaction and should not be treated as suitable for that purpose. They are detailed in paragraphs 1 to 6 of the release letter. 2

4 9. To reinforce the importance of the characteristics and to assist in excluding any duty that might otherwise arise, this guidance suggests two actions: 1) attaching a Notice to the working papers when access is provided which summarises the characteristics and records the exclusion of liability (an example of such a Notice is included as Attachment 1 of the example release letter in Appendix 2); and 2) obtaining an undertaking from the purchaser and investigating accountants to include such a standard Notice in the text of their due diligence report (see paragraph 7(3) and Attachment 1 of the example release letter in Appendix 2). 10. The above protections are built upon an additional undertaking provided by the purchaser and investigating accountants that they will not (save in defined cases, as set out in paragraph 7(1)(g) of Appendix 2) provide information obtained from their review to any other parties without the written consent of the auditors. The auditors will need to consider whether to grant such written consent based upon the relevant circumstances, including whether the release letter has been or is to be accepted by or on behalf of the new proposed recipient. 11. The release letter provides that the purchaser indemnifies the auditors for all loss, damage and costs (including legal costs) incurred by the auditors arising in the event that the purchaser or investigating accountants fail to comply with their obligations under the release letter and, as a result, a claim is made against the auditors. It is considered reasonable to require the protection of an indemnity in addition to a damages claim for breach of contract because the auditors are not performing any work for the parties to the transaction but are merely allowing access to papers (and related information and explanations) from separate audit work performed for a different purpose. In the circumstances the reinforcement, and the simplification of remedy, provided by an indemnity are considered justified. Information or explanations additional to the working papers 12. In providing information or explanations in relation to the working papers, auditors should be aware that extending explanations beyond those matters documented in the working papers increases the risk of assuming a duty of care to the recipient of such information. In particular the auditors should avoid giving oral representations, or warranties, especially about any matters arising after the date of the audit report. 13. Accordingly, in addition to considering carefully the nature of oral information or explanations they are willing to provide, auditors should re-emphasise at the beginning of such meetings the nature of the audit working papers, the purpose for and date on which they were prepared and that the auditors do not assume any duties, liabilities or obligations as a result of permitting access or providing information or explanations. This could be achieved by reading out or circulating the Notice contained in Attachment 1 to Appendix 2 at the start of the meeting. 14. Where potential purchasers wish to discuss matters outside of the auditors working papers, auditors request (preferably written) clarification of the detailed matters which the purchaser and/or investigating accountants wish to discuss and consider whether they are willing to do so. If they conclude that the risks can be properly managed then they seek informed consent from the target and vendor, and consider structuring such an arrangement as a separate engagement for the purchaser with appropriate liability protection. In all such cases auditors record the basis on which such discussions are held. The above considerations apply equally to explanations of tax matters and working papers. 15. Auditors would usually give access to all working papers recording the audit work performed. If auditors decide not to provide certain papers to the investigating accountants then they inform the investigating accountants and the purchaser that certain papers have been omitted (see footnote vii to the example release letter in Appendix 2). Content of the authorisation letters 16. The example authorisation letter in Appendix 1 is intended to be signed on behalf of the vendor and the target company whose working papers are to be made available. The purpose of the authorisation letter is to: obtain authorisation from the target company to disclose confidential information to the purchaser and the investigating accountants; and obtain the agreement of the vendor, the target company and their directors that the auditors will not be held responsible for the consequences of giving access to the working papers and the disclosure of confidential information. 17. In circumstances where the vendor is not a single corporate body but a number of individual shareholders, it may not be practicable or appropriate for the auditors to obtain the signature of all the shareholders in addition to the directors of the target company. In such situations the auditors will need to determine whether or not to give access without obtaining the shareholders signatures to the authorisation letter. A relevant factor will be whether the shareholder has any involvement in the sale process. Such would be unlikely to be the case, for example, where shareholders in a public company are passive investors in receipt of an offer for their shares, rather than being 3

5 personally involved in initiating the sale of their company. In the latter case, regulatory issues will be of particular relevance in determining whether it is appropriate or necessary for the auditors to seek the signature of the shareholders to an authorisation letter. Where the auditors determine that it is appropriate to seek an authorisation letter, but there is a practical constraint in their ability to obtain signature by all the shareholders, the auditors might be willing to proceed to release the papers on the basis of an authorisation letter signed by a majority of the shareholders. In so doing, the auditors would need to consider the risk that an individual shareholder may claim that such an approach did not carry his authority. Obtaining an indemnity from a majority of the shareholders might be possible in order to minimise this risk. Content of the release letters 18. Appendix 2 gives an example of a release letter. The terms of the example release letter: (1) require the purchaser and the investigating accountants to acknowledge that the auditors owe no duty of care to them as a result of permitting access; (2) restrict the purchaser and the investigating accountants from passing information obtained from the review to other parties; (3) require the purchaser and the investigating accountants to agree that the auditors have no liability to them and accordingly that they will not bring any claims against the auditors; (4) require the investigating accountants to include within any i report that they issue a brief Notice (see Attachment 1 to the release letter) explaining the characteristics of the working papers and disclaiming any duty of care by the auditors as a result of providing access to the working papers; and (5) provide for the purchaser to agree to indemnify the auditors against any claims arising from any breach of the release letter by the purchaser or the investigating accountants. 19. The indemnity in the example release letter in Appendix 2 is not as widely drafted as the indemnity in the previous example of the release letter that was attached to the guidance note issued in October This included an indemnity for any claim arising from the access to the working papers, whereas the indemnity in the example release letter in Appendix 2 is restricted to any claims arising from any breach of the release letter by the purchaser or the investigating accountants. 20. Following representations with member firms and groups representing purchasers and after taking legal advice, the Institute has concluded that the new form of indemnity, when used with the new release letter and Notice and in conjunction with the new authorisation letter, should expedite the process of providing access to working papers, while at the same time providing reasonable protection to auditors. 21. Member firms must decide whether, in a particular case, the new form of indemnity provides adequate protection or whether the auditors should insist on a more widely drafted indemnity. If disclosure of the working papers, or a report prepared from the papers, is to be made to a wider group, not all of whom are prepared to provide an indemnity in respect of their own breach of the terms of the release letter, the auditors may alternatively seek an indemnity from one of the principal parties to the transaction who is prepared to indemnify the auditors generally against claims arising from the release of the working papers. (See footnote xi to the example release letter in Appendix 2). 22. Auditors are recommended not to agree to any request by the investigating accountants to review or approve their due diligence report. Such requests do not give auditors any added protection and may serve to confuse auditors roles in transactions. Other parties who will have access to information derived from the audit working papers 23. The example release letter in Appendix 2 is drafted envisaging a simple investment transaction where an existing corporate entity purchases a subsidiary of the vendor. Where there are investment and lending transactions which do not fall easily into this category (management buy outs and flotations are examples), the auditors will need to consider whether or not the release letter needs to be amended and further guidance is provided below. 24. In general, the auditors need to consider which entities might wish to have access to their working papers and any report which includes information derived from the audit working papers. 25. In particular, auditors should note the impact of paragraph 7(1)(g) of the release letter in Appendix 2. This restricts the addressees of the release letter from passing on information derived from the audit working papers to third parties without the prior written consent of the auditors. If the addressees fail to obtain such a consent and pass on the information to a third party, the addressees will, subject to the exceptions set out in that paragraph, be in breach of the release letter and the indemnity will apply to the extent that any loss arises as a result of such a breach. i Refer to paragraph 32 with respect to an accountants report in an investment circular. 4

6 (A) Syndicated financings 26. In certain situations, for example in connection with syndicated financings, the investigating accountants may be requested to provide copies of their investigation report, incorporating information derived from their examination of the audit working papers, to other parties who may be considering participating in the proposed transaction, for example as co-investors or lenders. Typically such parties will not be signatories to the auditors release letter because they could not be identified at the time the release letter was originally executed. Disclosure of the report in these circumstances and without consent would be in breach of paragraph 7(1)(g) of the example release letter. 27. In these circumstances, the investigating accountants would need to seek the consent of the auditors to release the report to actual or potential investing or lending syndicates. In considering whether to give consent, the auditors will need to be assured that an appropriate mechanism is to be put in place to obtain the protections of the release letter in respect of all members of the syndicate. Depending on the size of the syndicate, it might be appropriate for the example release letter to be modified for signature by the lead bank or equity provider for itself and on behalf of all members of the syndicate, for example by inclusion of the following paragraph: This letter is addressed to [Lead Bank/Lead Equity Provider] for itself and on behalf of all [banks/equity providers] listed in the [Loan/Equity Agreement] (together the [Banks/Equity Providers] ). By signing and accepting the terms of this letter, [Lead Bank/Lead Equity Provider] warrants and represents that it has authority to accept the same on its own behalf and as agent for the [Banks/Equity Providers] 28. The auditors might be asked to consider modifying the form of indemnity at paragraph 7(2) of the letter in these circumstances, for example to provide that the Lead Bank/Lead Equity Provider provides an indemnity in respect of its own breach only and that other syndicate banks are not required to provide an indemnity. In these circumstances the auditors would, for example, not have the benefit of an indemnity where a person has without permission received information from the working paper review from a syndicate bank other than the Lead Bank. Accordingly the auditors will need to understand the basis of any such requests for amendment before deciding whether to accept such requests. The fact that there may be less proximity (and hence a lower risk of a duty of care being established) between the auditors and a recipient who has not had direct access to the working papers and who gains access to information without permission might be a relevant consideration. 29. Where syndication agreements have not yet been drawn up providing for a Lead Bank/Equity Provider to act as agent for other members of the syndicate, it is normally appropriate to require potential members of the syndicate to sign a release letter in their own right. In some cases there may be practical problems with this approach, for example where a large number of potential syndicate members are involved. It is not uncommon for the investigating accountants report to be distributed, typically in draft form, to assist potential finance parties to consider whether they wish to proceed to provide equity or loan finance. In seeking consent from the auditors to distribute the report in these situations, the investigating accountants will need to explain to the auditors the arrangements which are being made for the circulation of the report (containing the appropriate Notice see Attachment 1 to the release letter), in order to determine whether the auditors can benefit from appropriate protections which the investigating accountants will themselves be obtaining from such parties prior to and as a condition of distribution of their report. These might for example take the form of an acknowledgement by the receiving party that no rights are acquired against the investigating accountants. This acknowledgement might be extended to the auditors, for example drawing attention to the Notice reproduced within the report. 30. In the event that the receiving party does proceed to join the syndicate, the auditors would normally expect the investigating accountants to include the signing of a modified release letter, as discussed in paragraph 27 above, as one of the completion processes required prior to the finalisation of its due diligence report. 31. These arrangements may, for example, be anticipated in the following illustrative form in the investigating accountants own release letter for their [draft] report to a prospective lender or investor: a. It is a condition of the receipt of our [draft] report by you as a prospective [lender]/[investor] that you accept that: we have no responsibility or liability whatsoever to you in connection with our report; [auditors] have no responsibility or liability whatsoever to you in connection with their audit or any information or explanations sought by us in the course of our review of the audit working papers [and the tax papers]. We draw your attention to the Notice included on page [ ] of the report. b. If you do lend to or invest in [Company], we agree to consider acceding to a request from you, if made in advance of your lending or investing, to recognise you as an addressee of the report, on the following conditions: that you will be bound by and will accept all the provisions of our engagement letter (and will bind yourself to the auditors and accept all the provisions of a letter in the terms of the release letter of the auditors dated [ ] (but adjusted to refer to you) setting out the terms under which access to the audit working papers [and tax papers] and any information and explanations in relation to them have been provided); [other conditions required by the Investigating Accountants]. 5

7 (B) Flotations 32. Where access is to be provided in connection with the flotation of the target company, (a situation envisaged, for example, by paragraph 76 of Statement of Investment Circular Reporting Standard 200) the auditors are advised to obtain a release letter from the firm acting as reporting accountants (assuming that the audit firm and the reporting accountants are not the same entity). Where a new company is to be incorporated for the purpose of the float, that company would also be expected to sign the release letter, including the indemnity (being for this purpose similar to the purchaser in an acquisition situation). The sponsor would also be expected to sign the release letter in its role as professional adviser to the company being floated. Where there is no new company being formed and the auditors wish to seek the protection of an indemnity before releasing the audit papers, the auditors may wish to seek legal advice as to whether an indemnity is legally available from the audit client in the particular circumstances. The auditors will normally expect the audit client and, where applicable, its shareholders (refer to paragraph 17) to sign an authorisation letter. Where the reporting accountants are preparing an accountants report (short form report), it would be appropriate to tailor paragraph 7(3) of Appendix 2 to make clear that there is no requirement to attach or refer to the Notice within the published accountants report. 33. If the firm acting as reporting accountants has previously also acted as auditors, the firm may wish to explain in its reporting accountants engagement letter the basis on which any audit work was previously undertaken and how audit opinions were previously given. (C) Vendor due diligence ( VDD ) 34. Where a vendor has instructed a firm of accountants to prepare a due diligence report which eventually will be addressed to a purchaser (the vendor due diligence report ), the auditors will need to consider how they will manage their risk if the investigating accountants preparing the vendor due diligence report wish to review the auditors working papers. The principles of protecting the auditors from risk arising from granting access to working papers apply equally in a vendor due diligence situation as in an ordinary acquisition due diligence situation. Authorisation letter for VDD 35. The auditors will require the vendor and the target company to sign an authorisation letter as the first stage prior to any access being given to the audit working papers. Further, given that the vendor instructs the investigating accountants to undertake the vendor due diligence, the auditors will extend the wording of the authorisation letter to include a duty of confidentiality in respect of the working papers and any information derived from them or provided in relation to them and will consider requesting the vendor to provide an indemnity in respect of any claims against the auditors that arise as a result of a breach of the vendor s or investigating accountants obligations under the authorisation letter. The rationale for requesting such an indemnity from the vendor rests on the fact that the vendor (rather than the purchaser) controls distribution of the vendor due diligence report. Auditors assess the risks associated with the vendor s and investigating accountants control of the report in deciding whether such an indemnity is required. Release letters for VDD 36. Assuming that the investigating accountants are not from the same firm as the auditors, the auditors will require a release letter signed by the investigating accountants engaged by the vendor (at that stage potential purchasers will not have been identified). This release letter will be adapted from but substantially in the form of Appendix 2, without the indemnity paragraph (7(2)). In the normal course of events, paragraph 7(1)(g) in the release letter manages the risk to the auditors by including a prohibition on the investigating accountants releasing their report to the purchaser without the prior consent of the auditors which would only be given on the condition that such purchaser has agreed to its own release letter as set out in the following paragraph (although an alternative to this consent mechanism is included in paragraph 38). 37. The auditors manage their risks to potential purchasers and the eventual purchaser in broadly the same way as they manage their risks to potential members of banking syndicates (see paragraphs 29 to 31 above). Before consenting to the distribution to potential purchasers of a vendor due diligence report, the investigating accountants will need to explain to the auditors the arrangements which are being made for the circulation of the report (containing the appropriate Notice see Attachment 1 to the release letter). Such arrangements will normally involve the investigating accountants agreeing their own release letter with the potential purchasers, including an acknowledgement by the receiving party that no rights are acquired against the investigating accountants. As envisaged for banking syndicates, the auditors would normally expect the investigating accountants to modify their release letter to reflect the conditions imposed by the auditors. The auditors would not consent to the due diligence report being addressed to the eventual purchaser until the eventual purchaser has signed a release letter in the standard form attached as Appendix Alternatively, however, the auditors might be prepared to recognise from the outset that the investigating accountants will require permission to circulate their report to prospective purchasers and ultimately address their report to the successful purchaser. Illustrative language which the auditors might be prepared to incorporate in the release letter to permit this arrangement is set out below. 6

8 Replace final sentence of paragraph 7(1)(g) and the whole of paragraph 7(2) with the following: The Investigating Accountants may allow access to the Information or any part thereof, in the form of a report of Investigating Accountants incorporating or referring to any part of the Information, to any prospective purchaser of the Company ( Prospective Purchaser ) provided that the Investigating Accountants obtain the express prior agreement and acknowledgement of each Prospective Purchaser, addressed to this firm, that (a) this firm has, to the fullest extent permitted by law, no duty or liability and assumes no responsibility to Prospective Purchaser or its professional advisers, whether in contract or tort or under statute or otherwise (including in negligence), with respect to or in connection with the Information or any part thereof or the report and that (b) Prospective Purchaser will not disclose (including by reference or by copy, in whole or in part) any Information, including without limitation the report, to any other person or entity. Prior to the Investigating Accountants addressing to any party acquiring interests in the Company ( Purchaser ) any report incorporating or referring to any part of the Information, the Investigating Accountants shall procure that Purchaser binds itself to this firm and accepts all the provisions of a letter in the terms of this letter (but adjusted to refer to Purchaser), together with an obligation in the following terms: To the fullest extent permitted by law, Purchaser agrees to indemnify and hold harmless this firm against all actions, proceedings and claims brought or threatened against this firm and all loss, damage and expense (including legal expenses) relating thereto, where such action, proceedings or claim has arisen out of or results from or is connected with the failure of Purchaser, or any of its professional advisers or Investigating Accountants to comply with the terms of this letter. VDD performed by the same firm as the auditors 39. If the vendor due diligence report is prepared by the same firm as the auditors, the manner in which the auditors manage their risk to the purchaser (including prospective purchasers) in relation to their audit working papers might be linked to the management of their risk (as investigating accountants) to such parties in relation to the vendor due diligence report. 40. The firm could require the purchaser to agree to the terms of the release letter before agreeing to address the vendor due diligence report to the purchaser. The release letter would then not be signed until the purchaser has been identified and the vendor due diligence report is about to be addressed to the purchaser. 41. Alternatively, the firm could place an obligation on the vendor to procure the purchaser s agreement with the firm to the release letter prior to releasing the vendor due diligence report to the purchaser or as a further alternative the accountants engagement letter with the purchaser could include the appropriate protection. 42. In all situations, the auditors will also wish to address the circumstances where the report, or a draft of the report, is to be circulated to prospective purchasers. The auditors might obtain at the same time a release of liability from any prospective purchaser both in respect of their capacity as auditors and investigating accountants as contemplated in paragraph 37 above. (D) Business refinancing where there is no acquisition 43. A firm of accountants may be instructed to report to funders in respect of a proposed refinancing of an entity. The accountants may, as part of their work, wish to review the audit working papers of that entity s auditors. In such circumstances, the risks to auditors are, in principle, the same as when investigating accountants review auditors working papers in connection with the preparation of a report for a purchaser. Accordingly, it is recommended that auditors obtain a signed release letter from funders and investigating accountants prior to releasing the audit working papers. Investigating accountants from the same firm as the auditors 44. If with the consent of the vendor, the target and the purchaser and assuming that appropriate measures have been implemented (including to protect each party s confidential information), the investigating accountants are from the same firm as the auditors, this does not decrease the risk to the auditors and so the auditors require the same protections in this situation as when the investigating accountants are from a different firm. 45. In such cases, practices will vary from auditor to auditor (for example, the release letter may be altered because the auditors do not see the need for the investigating accountants to be an addressee or signatory to the release letter). In addition, auditors may be prepared to restrict the indemnity to breaches of the release letter by the purchaser only. Consideration 46. Normally no charge in addition to a charge for the actual cost of copying certain working papers would be levied by the auditors (whether upon the purchaser, vendor or target) for grant of access to the working papers. Should consideration be received by the auditors, this may affect the perceived reasonableness of the exclusion 7

9 paragraph in the release letter and could increase the prospect of the auditors being taken to have assumed a duty of care. 47. If parts of the working papers are copied (at the sole discretion of the auditors) then a charge equal to the actual cost of copying may be made although it is highly desirable that there is a clear explanation that the charge is simply for the cost of copying. Where administrative costs in connection with the disclosure of the working papers are incurred and charged, it is normally more advantageous for them to be borne by the vendor. 48. In addition, any decision to charge a material fee to the target will require assessment in each case to ensure that the payment by the target does not amount to unlawful financial assistance in the purchase of its own shares. Conclusion 49. Auditors have the right to decide whether they should give access to their working papers or not and also on what terms access should be given. Their decision has to be made on consideration of the various interests represented. This paper, however, will give them a framework for alleviating the risk if they decide to allow access to their working papers. 8

10 APPENDIX 1 SPECIMEN CLIENT AUTHORISATION LETTER PRIVATE AND CONFIDENTIAL The Directors [Vendor] [Address] The Directors [The Company] [Address] [Date] Dear Sirs Proposed sale of [Company Limited] ( the Company ) by [XYZ plc] ( the Vendor ) to [ABC plc] ( the Purchaser ) Thank you for your telephone call [today] alerting me to the proposed sale by the Vendor [of the ordinary shares of the Company] to the Purchaser ( the Proposed Transaction ) in which you requested this firm to allow [the Purchaser and/or]i the Purchaser s accountants, [PQR & Co] ( the Investigating Accountants ) access to this firm s working papers relating to the statutory audit[s] of the Company s [and its subsidiaries ] financial statements for the year ended 31 December 20XX ( the Audit Working Papers ). [As you are aware, this firm has not yet completed this year s statutory audit[s] of the Company s [and its subsidiaries ] financial statements, and therefore, the Audit Working Papers for this year are incomplete. Further this firm is not able to give any opinion on those financial statements and has not done so. Nevertheless, I understand that the Purchaser and the Investigating Accountants still wish the Investigating Accountants to review such Audit Working Papers as are available to date.] [In addition, you requested this firm to allow the Investigating Accountants to review the taxation returns and computations of the Company [and its subsidiaries], so far as in the possession of this firm, as submitted to and/or agreed with the UK Inland Revenue for each of the last [insert number] years[, working papers relating to those returns and computations] and copies of the correspondence and related documents passing between this firm and the UK Inland Revenue in respect of those returns and computations (together, the Tax Papers ).] This firm s general policy is not to allow third parties to have access to the working papers in the possession of this firm. However, this firm is content to allow such access to the Audit Working Papers [and the Tax Papers] ([together,] the Papers ), but only on the basis of the guidance contained in Technical Release Audit 04/03 issued by the Institute of Chartered Accountants in England & Wales. In accordance with that guidance I am now writing to confirm your agreement to the terms set out in this letter and to secure the authorisation of the Company [and its subsidiaries] for that access. As a condition of providing access to the Investigating Accountants and responding to any requests for information and explanations in relation to the Papers in the course of or in connection with their review of the Papers, this firm requires that the Purchaser and the Investigating Accountants agree to the terms of the letter enclosed. As you will appreciate, the Audit Working Papers were created for the sole purpose of the statutory audit[s] of the Company s [and its subsidiaries ] financial statements [and the Tax Papers were prepared and/or obtained for the purpose of calculating and agreeing the Company s [and its subsidiaries ] UK tax liabilities]. The Papers were not created for the purpose of the Proposed Transaction. Consequently, the information in the Papers should not be treated as suitable for the purposes of the Proposed Transaction. Furthermore, it is not this firm s function or responsibility to provide to the Purchaser or the Investigating Accountants any Papers that may come into existence, or information that may come to this firm s attention, after [insert date]. Accordingly, this firm requires the Vendor and its directors and the Company [(and its subsidiaries)] and [its] [their] directors to agree to the following conditions: (a) They each accept the risk, and do not and will not hold this firm responsible, if the Investigating Accountants review of the Papers or any information or explanations that this firm gives to them in relation to the Papers or in connection with their review of the Papers: i The auditors will expect to provide access only to persons knowledgeable as to the audit process i.e. typically the Investigating Accountants only. 9

11 (i) (ii) (iii) results in or contributes to the termination or reduction of the interest of the Purchaser in, or to the alteration to the proposed terms of, the Proposed Transaction, or otherwise affects the Proposed Transaction or the prospects of its maturing into a binding transaction; or causes an action or proceeding to be brought at any time against the Vendor or its directors or the Company [(or any of its subsidiaries)] or [its] [their] directors [respectively]; or results in the Purchaser, the Investigating Accountants or any other person or entity using or misusing any confidential information obtained from a review of the Papers or from any information or explanations given by this firm. (b) They each accept that, to the fullest extent permitted by law, this firm owes them no duty of care or other obligation and has no liability to them, in relation to or in connection with the Proposed Transaction as a result of granting the Investigating Accountants access to the Papers or any information or explanations that this firm gives in relation to the Papers or in connection with the review by the Investigating Accountants of the Papers. The audit of the financial statements of the [Company/Companies] was undertaken by and is the sole responsibility of this firm, that is [insert full, exact name of UK firm carrying out the audit]. In paragraph (a) and (b) above references to this firm, where appropriate in the context, shall have an extended meaning so that they include, in addition to [insert full, exact name of the UK firm carrying out the audit], [partners/ directors/ members], employees and agents of this firm [and any person or organisation associated with this firm through membership of the international association of professional service firms to which this firm belongs and their [partners/ directors/ members], employees and agents] ii. This letter is for the benefit of all those included within the reference to this firm and each of them may enforce in their own right all of the terms of this letter. Please confirm that the Company [and its subsidiaries] authorise[s] this firm to allow access to the Papers and to give information or explanations on the terms described above by signing the enclosed copy of this letter on behalf of the Vendor and its directors and the Company and its directors [and its subsidiaries and their directors] and returning it to this firm marked for my attention. I hope the Proposed Transaction proceeds smoothly. Yours faithfully ACKNOWLEDGEMENT Acknowledged and agreed, for and on behalf of [Vendor] and the directors of [Vendor]. Director Date Acknowledged and agreed, for and on behalf of [the Company] and the directors of [the Company] Director Date [Acknowledged and agreed, for and on behalf of [subsidiaries] and the directors of [subsidiaries] Director Date] ii The clause in square brackets is intended to be used where the audit firm is a member of an international group and wishes to seek to extend material protections of the letter to all members of the group for example, where the UK audit firm s working papers contain information derived from an overseas audit firm within the same international group. 10

12 APPENDIX 2 SPECIMEN RELEASE LETTER TO PROSPECTIVE PURCHASER AND INVESTIGATING ACCOUNTANTS (The Release Letter assumes a proposed purchase of a company and that both Audit Working Papers and Tax Papers are to be made available. It must be amended as appropriate for the circumstances of each transaction.) PRIVATE AND CONFIDENTIAL [Purchaser] [Address] [Investigating Accountants] [Address] [Date] Dear Sirs PROPOSED ACQUISITION OF [COMPANY] LIMITED 1. In connection with the proposed acquisition by [ABC plc] ( the Purchaser )iii of [Company] Limited ( the Company ) ( the Proposed Transaction ) the Company [(and the subsidiary undertakings identified in Attachment 2 iv ) (together the Companies )] [has/have] requested this firm to allow [the Purchaser and/or] [Firm of Accountants] ( the Investigating Accountants ) access to this firm s working papers relating to the statutory audit[s] [(including the audit[s] currently in progress) v ] of the financial statements of the [Company/Companies] for the year[s] ended [date] ( the Audit Working Papers ) [and the taxation returns and computations of the [Company/ Companies], so far as in this firm s possession, as submitted to and/or agreed with the UK Inland Revenue for each of the last [insert number] years[, working papers relating to those returns and computations] and copies of the correspondence and related documents passing between this firm and the UK Inland Revenue in respect of those returns and computations (together the Tax Papers ) vi ]. [[The Company/Companies] [has/have] authorised this firm at this firm s discretion to give information or explanations in relation to the Audit Working Papers [and the Tax Papers] or in connection with the review by the Investigating Accountants of the Audit Working Papers [and the Tax Papers]]. The Audit Working Papers [and the Tax Papers together] are also referred to below as the Papers. 2. The Purchaser and the Investigating Accountants should note that this firm has not reported on [the Company s/ the Companies ] financial statements for any period subsequent to [date] [nor have any tax liabilities of the Company/Companies] been agreed for any period subsequent to [date]] and significant events may well have occurred since [that date/ those dates]. It is not this firm s function or responsibility to provide to the Purchaser or the Investigating Accountants any Audit Working Papers [or Tax Papers] that may come into existence, or information that may come to this firm s attention, at any point after [insert date]. vii 3. This firm does not accept or assume responsibility to anyone other than the [Company/Companies] and the [Company s/companies respective] members as a body, for its audit work, for its audit report(s) or for the opinions it has formed. The statutory audit is undertaken in order that this firm might report to the [Company s/companies respective] members, as a body, in accordance with Section 235 of the Companies Act The audit procedures and the Audit Working Papers were designed and created solely for the purpose of enabling this firm to form and state an opinion to the [Company s/companies respective] members as a body, in accordance with the statutory requirements for audit, on whether the financial statements of [the Company/the Companies], which are the responsibility of the directors of [the Company/the Companies], give a true and fair view of the state of affairs of [the Company/the Companies] as at the end of the relevant financial year and of the profit and loss for the period then ended. This firm s auditing procedures were designed to enable this firm to express an opinion on [the Company s/the Companies respective] financial statements as a whole and not, for example and save where otherwise expressly stated, on individual account balances, financial amounts, financial information or the adequacy of financial, accounting or management systems. [The Tax Papers were prepared and/or obtained solely for the purpose of calculating and/or agreeing [the Company s/the Companies ] tax liabilities.] iii If there is an identified investor or acquisition lender consideration should be given to addressing the letter to them as well and adapting the contents accordingly. iv Where access is to be given to the Papers for a group of companies, the names of the companies should be listed in an Attachment 2. v If access is to be granted to the Audit Working Papers on an incomplete audit, the following wording should be added to the end of paragraph 2: This firm has not yet completed this year s statutory audit[s] of the Company s [the Companies ] financial statements, and therefore, Audit Working Papers for this year are incomplete. For the avoidance of any doubt the audit will not be completed in order that or with the intention that the Purchaser or the Investigating Accountants should rely on it. vi If the tax information to be provided includes any relating to pre self-assessment periods for which the return and computations have not been finally agreed by the Inland Revenue, the following wording might be added: The corporation tax return[s] and computations for the accounting period ended [date] have not yet been agreed finally with the Inland Revenue. Accordingly, you will appreciate that the figures and tax liabilities shown in the Tax Papers may change. Where tax information to be provided includes any company tax returns relating to self-assessment accounting periods, the appropriate wording might be added from the following: The company tax return[s] for [identify relevant company or companies] for the accounting period[s] ended [date] have not been subject to a formal Inland Revenue enquiry. The company tax return[s] for [identify relevant company or companies] for the accounting period[s] ended [date] [has/have] been subject to a formal Inland Revenue enquiry which [has/have] been completed [and the return[s] amended accordingly]. The company tax return[s] for [identify relevant company or companies] for the accounting period[s] ended [date] [is/are] currently the subject of a formal Inland Revenue enquiry and accordingly you will appreciate that the return[s] and the figures and liabilities shown in the Tax Papers may change. vii It would normally be expected that the firm would give access to all Audit Working Papers. If certain Audit Working Papers are not to be made available that fact should be stated. Arrangements for access to electronic working papers could also be confirmed here. 11