How to give a reference that serves the needs of your client – while protecting your own interests
A reference given by an accountant will usually meet the needs of lenders, letting companies and insurers, and summarise the financial viability of their clients who intend to borrow money or undertake other obligations that are contingent on their earning capacity.
It is in both lawyers’ and accountants’ interests to understand how much weight will be placed upon the words of the reference. This note intends to cover the issues accountants should consider when preparing a reference, to accurately reflect the financial position of their client.
The amount of information upon which an accountant can base their reference will depend on the length of time they have acted for their client and the quality of the accounting information they have access to. Accountants may decline to provide a reference due to a limited amount of experience of the client, insufficient information, or doubt regarding the client’s ability to fulfil the commitment. In a society where income streams are now so diverse, recent advice is that if accountants cannot be certain of the validity of the information from their client, they are encouraged to decline to produce any view (ACCA Rulebook, paragraph 320.9 A1).
What is the point of the reference if it cannot be relied upon?
Accountants should clarify the extent of the responsibility they agree to undertake regarding the reference and specify what information will form the basis of their work. Likewise, it is important to consider who might rely upon the words of the reference.
The decisions of the courts maintain that ‘persons professing a special skill’ could be liable to accusations of negligence towards those to whom they owed a duty of care: this includes third parties. This might arise when the professional knows or ought to know (ACCA factsheet: Professional liability of accountants and auditors):
To determine the catchment for third parties, the three-fold criteria introduced in Caparo Industries plc v Dickman and others (1990) and endorsed in Law Society v KPMG Peat Marwick (2000) is applied:
While accountants may not be able to avoid liability to third parties, there are steps to reduce exposure to claims by third parties.
Usually, a reference is provided for a specific purpose, which the accountant should be aware of. Likewise, the accountant should be aware that a third party has an interest in the words of the reference and therefore has a right to rely upon it for said purpose. Nevertheless, it could be argued that a reference for a commitment of £10,000pm will not be suitable or reasonable to rely upon for a commitment of £100,000pm.
References should not be so general that they could be circulated to any third party for any purpose. To avoid this ‘catch-all’ nature, current practice suggests a rubric similar to:
‘This reference dated X has been prepared for the private use of X (the client / requestor) only, and on condition that it must not be disclosed to any person without the written consent of Y (the accountant). This reference is produced for the purposes of…’
Usually, disclaimers are regarded as inappropriate or ineffective as they can discredit the work undertaken by the accountant.
The perception of a disclaimer may depend on whether a reference is requested directly from a client to be passed on to a third party, or from a third party directly.
The former may risk imposing a dual duty of care. This is when a reference is expected to be relied upon by a third party, but the disclaimer only seeks to apply against the third party. This is unlikely to succeed since the third party will rely on the reference in assumption that the accountant has satisfied its duty to its client, rendering the disclaimer ineffective.
However, if a reference is given directly to the third party, no dual duty of care is established. Normal commercial practice is to state that, although the reference is given in good faith, the accountant accepts no financial responsibility for the opinion. These disclaimers are usually effective because references are not based upon extensive research by the accountant.
References prepared by accountants do not intend to absorb losses suffered by third parties on their client’s behalf. Accountants are not party to contract/s, and it would be unfair to hold them to such a standard. Instead, a reference is prepared to allow a commercial decision to progress.
In the unfortunate situation where the legitimacy of a reference is challenged, accountants should feel confident that they can defend their professional judgment.
Accountants will be unlikely to specify the documents that have informed the reference. Not supporting a reference with evidence does not prove, by default, that the reference was inaccurate and/or negligent.
First, legal advice privilege does not apply to accountants.
Yet, similarly to lawyers, ACCA's rulebook imposes upon its members a professional duty of confidence and confidentiality to current and past clients. Rule 114.1 states an accountant is not to disclose confidential information without proper authority of its client, or after that relationship has ended (ACCA Rulebook, paragraph R114.1 (d) and (f)).
Supplementary guidance outlines accountants may produce documents under voluntary disclosure to protect professional interests. Yet, this only applies to 'proper authorities', such as HMRC (ACCA Rulebook, section B1, paragraph 34).
Granted, if a client authorises the release of documents, then accountants can proceed as they wish. However, it poses a difficulty for accountants who cannot obtain consent, for example if a client’s venture has collapsed and is no longer contactable.
ACCA indicates it might be appropriate to disclose information to protect the professional interests of the accountant in legal proceedings (ACCA Rulebook, paragraph 114.1 A1), and that the principle of confidentiality may threaten an accountant's compliance with other principles. This includes the professional duty or the right to disclose (when not prohibited by law) to protect the professional interests of an accountant in legal proceedings (ACCA Rulebook, section C1 Paragraph (2)(e)(ii)). Although legal proceedings are not defined in ACCA’s rulebook, it is difficult to see how the principle of confidentiality would supersede an order for disclosure from the courts.
Overall, references are a useful tool for insight into an individual or company. On occasions when accountants feel they cannot comment, they should feel able to politely decline.
When accountants do provide a reference, they should do so with confidence in themselves that they can make use of the information they relied upon, if required.
Robert Lloyd – Partner, Caytons
Caytons provides the legal helpline for policyholders under the ACCA professional indemnity insurance scheme,which is managed by Lockton.
If you have any questions about professional indemnity insurance, please contact your Lockton Account Manager for further advice or email ACCAaccountants@uk.lockton.com.
Lockton is ACCA’s recommended broker for professional indemnity insurance