Lawyers and Audits – the New Joint Policy Statement Effective December 1, 2016
Shareholders, investors, lenders and others have a vital interest in proper financial disclosure by entities in which they have an economic interest. Making sensible business decisions is often difficult. It is impossible without proper information. Audited financial statements play a central role in financial disclosure.
Disclosure is a good thing and a bad thing
Some assets and liabilities are simply reflected in financial statements. Some are not so simple. Contingent assets and liabilities can be tricky. The contingency may or may not arise. Assuming the contingency, the value of the contingent asset or liability is often uncertain. The uncertainties may be such that a value is not fairly included in the balance sheet but a note may be appropriate to alert the reader to the risk. What should be disclosed and how is a matter of importance for auditors who are called upon to opine on financial statements.
Lawyers are commonly involved in significant contingencies. Whether in civil, regulatory or administrative matters, lawyers pursue and defend their clients’ interests. Whether the client will be successful, or not, can be uncertain as may be the quantum. Assessment of the current value of contingencies can be difficult. It is no surprise that clients and auditors look to lawyers to assist in the evaluation of these contingencies.
But there is a complication. These contingencies are determined through an adversarial process. The client is entitled to professional confidentiality and privilege in its dealings with counsel.
On one hand, disclosure is necessary for fair evaluation of the financial situation of the client. On the other hand, disclosure may adversely affect the financial situation of the client by compromising the interests of the client in the adversarial process. Disclosure is a good thing from the one perspective. Admissions against interest are a bad thing from the other. Assistance from lawyers makes for better financial disclosure. But assistance that compromises privilege thereby compromising the client’s interests is a bad thing.
Ironically, perfect disclosure of a client’s financial information may compromise the client’s financial prospects.
A new Joint Policy Statement
In 1978, the Canadian Bar Association and the Canadian Institute of Chartered Accountants released the Joint Policy Statement on Audit Enquiries (1978). That Joint Policy Statement sought to advance two key goals. The first was to practically address the inherent conundrum described above, to maximize financial disclosure while minimizing the adverse financial consequences of doing so. The second was to allow two quite different professions to communicate with each other.
Nearly forty years later, the Canadian Bar Association and the Auditing and Assurance Standards Board of Chartered Professional Accountants Canada have now replaced the old Joint Policy Statement.
The new Joint Policy Statement is effective for inquiry letters dated December 1, 2016 or later.
What has changed?
In some respects, Joint Policy Statement is unchanged. There is value in established practice. For example, “claims” and “possible claims” are important concepts under the Joint Policy Statements. Tinkering with the definitions of these important terms is tempting. But the likely consequence would be that some lawyers would continue to use the old definitions and new definitions might contain new difficulties. There is no change to the meaning of “claims” and “possible claims” which remain key definitions.
Another important principle is that lawyers are not to express opinions in audit response letters. Management evaluates claims and possible claims. Lawyers advise whether the management evaluations are reasonable. This approach reflects that auditors rely on management in the audit process and seeks to protect privilege by not having lawyers express their opinions. This approach is unchanged.
But there are changes. Among the more significant changes is the express inclusion of in‐house counsel, recognizing the expanded role of in‐house counsel in client matters. Another significant change seeks to resolve concerns expressed by the legal profession regarding communication protocols with the auditors, particularly with respect to the timing of inquiries and responses.
A further significant change reflects the emergence of new audit standards in recent years. In 1978, there was just one financial reporting framework. In 2016, financial reporting frameworks include the International Financial Reporting Standards (IFRS), Accounting Standards for Private Enterprises (ASPE), Accounting Standards for Not-for-profit organizations (NFPOs). Rather than seeking to have lawyers learn and apply new and different frameworks, the Joint Policy is written on a framework-neutral basis. Audit inquiries are to be written so that audit responses can be written without reference to the applicable framework. The Joint Policy seeks to allow lawyers to be lawyers and auditors to be auditors and yet to communicate with each other.
Assistance is available
The CBA has provided on-line tools to assist lawyers with the new Joint Policy Statement as follows:
- Joint Policy Statement on Audit Inquiries (2016)
- CBA Joint Policy Statement English home page and French home page
- Frequently Asked Questions
- JPS Flowchart
- Complimentary Webinar (Feb. 2015)
The CBA is also providing a webinar on May 25, 2016 entitled The New JPS: What You Need to Know
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