As auditors, our responsibility is to provide an independent opinion on a company’s financial statements. However, this role is sometimes misunderstood, particularly by third parties who may attempt to rely on the audit report for purposes beyond its intended scope. This is where the Bannerman paragraph becomes important — acting as a disclaimer to clarify the intended audience of the auditor’s report and manage professional risk.
What is the Bannerman Paragraph?
The Bannerman paragraph arose following the legal precedent set in Royal Bank of Scotland plc v Bannerman Johnstone MacLay and others [2002]. In this case, it was ruled that auditors could, in the absence of an appropriate disclaimer, be held liable to third parties who relied on the audit report.
To mitigate this risk, a disclaimer such as the following is commonly included in audit reports:
“This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.”
This paragraph is widely known as the Bannerman paragraph.
Is it Mandatory?
Interestingly, the Financial Reporting Council (FRC) does not mandate the inclusion of the Bannerman paragraph. Its use is left to auditor(s) discretion.
However, professional bodies have issued differing views:
- ICAEW recommends including the Bannerman paragraph, particularly where there is a realistic possibility that third parties may read and rely on the audit report.
- ACCA, by contrast, generally discourages its use, expressing concerns that such disclaimers may be misunderstood or could limit the perceived value of the audit report.
Our Recommendation
At HAT, we recommend including the Bannerman paragraph in all audit reports. Given the potential legal exposure and to ensure clarity regarding the purpose and intended users of the audit opinion, its inclusion provides a prudent layer of protection.
Why It Matters
- Clarifies scope and Audience
The audit is conducted for the benefit of the company’s members — not third parties such as lenders or suppliers. The Bannerman paragraph makes this distinction explicit.
- Protects Against Legal Claims
Including the paragraph limits the auditor’s duty of care, helping reduce exposure to third-party claims in the event of financial loss.
- Promotes Good Practice
Including clear disclaimers aligns with best practice and ensures consistency across audit engagements.
Conclusion
The Bannerman paragraph might seem like a minor addition to the audit report, but it plays a significant role in protecting the auditor’s position and clarifying the boundaries of our responsibility. While its inclusion is not compulsory under auditing standards, in practice, it reflects sound professional judgement.
In a complex and increasingly litigious environment, adding the Bannerman paragraph is a sensible measure — reinforcing the scope of our work and the reliability of the audit process.
