The attention of the Law Society's Company Law Committee has been drawn to an additional question being included in some audit firms' letters to solicitors seeking information for company audits.

The particular enquiry seeks details of any actual or potential non-compliance with the laws and regulations which are central to the conduct of the company's business and of which the solicitors' firm is aware.This enquiry poses difficulties for firms in maintaining a record of all incidents of non-compliance of which they have become aware in advising the client company.

It could also require firms to form judgments as to whether a particular matter is essential to the conduct of the company's business and whether or not there has been non-compliance.There is a clear risk inherent in solicitors' firms trying to respond to this enquiry.

Furthermore, no solicitor should respond to such an enquiry without the express agreement of the client as a response could lead to the loss of professional privilege and might lead to an obligation on the auditors to alert regulators to a potential breach of which they were otherwise unaware.Practitioners are reminded of the guidance published by the Law Society on auditors' enquiry letters.

Although dating back to August 1970, this is reviewed periodically.

It is suggested that replies to enquiries of the nature described should follow the guidance given in 1970 and 1977 in relation to non-specific enquiries as to the solicitors' awareness (or otherwise) of contingent liabilities or litigation -- such enquiries should not normally be answered.The guidance is published below.Information provided by solicitors for company audit purposesFirst published in the Gazette, August 1970:1.

A practice has developed of auditors requiring their client company to write to the company's solicitors asking them to supply the auditors with particulars of all pending or threatened claims against the client company of which the solicitors may be aware, with an estimate of the amount of ultimate liability.

Sometimes these requests go considerably further and solicitors are asked wide-ranging general questions, such as whether there are any other circumstances known to them which might assist the auditors, including matters which might increase the company's assets as well as possible liabilities, and indicating that the reply might be quoted in the auditors' reports.2.

The council of the Law Society has been concerned with the implications of the responsibility which would be assumed by solicitors in complying with such requests and discussions on the matter have taken place between working parties appointed by the council and by the council of the Institute of Chartered Accountants in England and Wales.

Considerable agreement has been reached.3.

The council of the Law Society recognises the underlying purpose of these requests and appreciates that auditors are entitled to seek confirmation, from outside independent sources, of information supplied to them by the company's officials.

The council also accepts that the Institute of Chartered Accountants is entitled to lay down standards of professional competence which develop in accordance with modern ideas.4.

The working party of the institute, on its part, has recognised that, although independent confirmation should be sought by auditors in order to ensure that their audit is thorough and comprehensive and to guard against the danger of omissions, there must be some limits on the extent of the questions which can properly be addressed to the company's solicitors.5.

As a result of the discussions, agreement has been reached that a company may appropriately write at the request of its auditors to its solicitors asking them to confirm that in their opinion the amounts the directors suggest should be provided in respect of specifically identified contingent liabilities of the company are reasonable.

This would not, in the opinion of the council of the Law Society, involve solicitors in any unacceptable responsibility, and it is a service which, in the opinion of the council, the client is entitled to expect.

In any such case the solicitors are of course free to disclaim detailed knowledge of the matters in question and to add any qualification which they might consider appropriate.

It is the responsibility of the company, not the solicitors, to list the items and make the estimates, and solicitors should not be required to assume the role of prophets as to the outcome of any claim against a company.This would almost invariably depend on many factors outside the solicitors' knowledge.

Nevertheless, in carrying out their duties under the Companies Acts, company officials are entitled to invite the observations of the company's solicitors as to the estimated provision which the company should make in respect of any such contingent liability.6.

For such specific enquiries, the following specimen form of wording has been agreed by the respective working parties as appropriate for companies to address to their solicitors: 'In connection with the preparation and audit of our accounts for the year ended .

.

.

the directors have made estimates of the amounts of the ultimate liabilities (including costs) which might be incurred, and are regarded as material in relation to the following matters on which you have been consulted.

We should be obliged if you would confirm that in your opinion these estimates are reasonable.'7.

It is satisfactory that consultations between the two bodies have led to that measure of agreement.8.

Unfortunately, there is one respect in which It has not proved possible to reach agreement.

The point may appear to be a comparatively small one but in the opinion of the council of the Law Society it involves an important question of principle.

The council of the institute considers auditors may have a duty to ask solicitors to confirm further that there are no other material claims made or threatened against the company of which the solicitors are aware or, if there are, to specify them.

The council of the Law Society has taken the view that it is the responsibility of the company and not the solicitors to specify any claims which may be outstanding or threatened against the company, and that it is not part of the solicitors' duty to supply deficiencies in their clients' memory.

To do so would involve the solicitors undertaking a substantial and perhaps unsuspected burden.

In most cases it is impracticable for solicitors to produce a list at any particular moment of all matters which might give rise to claims against any particular client with an estimate of the possible liability.

Claims might arise under many different headings.

The council of the Law Society has been advised by leading counsel that if the solicitors, in answering such a non-specific and general request, omitted to refer to an outstanding claim on which some member of their firm or staff had been consulted which had been omitted from the client's list, the solicitors might well be liable for breach of contract or in negligence under the decision in Hedley Byrne & Co Ltd Heller (1964) AC 465.9.

Directors can reasonably be asked to accept the burden of specifying all claims outstanding or threatened against their company and it is the responsibility of officers of the company to provide that information (Companies Act 1967 s.114(5)).

Solicitors are not officers of the company and the duty to provide such information is not imposed upon them.

The Companies Act 1948 s.448 provides that relief may be given to officers of the company in case of any negligence or default by them if they have acted honestly and reasonably.

That section does not extend to solicitors and there is no reason why it should, since the furnishing of information in the form in which it is now being sought is not a duty in respect of which they might need the protection of the section.It is the experience of some solicitors that where they have not been willing to answer a non-specific enquiry the auditors have on this ground qualified their report.While the council of the Law Society would not seek to lay down what information auditors may ask for when they think corroboration of information provided by the company is required, it is unable to accept the view that it is appropriate for auditors in carrying out their duties under the Companies Act 1967 to qualify their reports solely because a non-specific enquiry had been addressed to solicitors who, being under no duty to reply, have not done so.10.

An enquiry addressed to a firm of solicitors which refers to claims A, B and C can be dealt with promptly by those in the firm having the conduct of those specific matters.

An enquiry which refers to claims A, B and C 'and any others there may be' can only be dealt with by detailed research and investigation into the solicitors' records and this, in the opinion of the council, should not be the responsibility of the solicitors.

There is a significant difference between the liabilities a solicitor might assume under the two forms of request.11.

The council of the Law Society regrets that in this respect its views are not identical with those of the Institute of Chartered Accountants.

The council's views, however, in addition to having been confirmed by counsel's opinion, have been strongly supported by the City of London Solicitors' Company and the Holborn and Westminster Law Societies.

The council is unable to recommend solicitors to comply with requests for information written by their client companies at the request of the auditors which are drawn more widely than in the form of the specimen wording.