You have just finished a client meeting when the email lands: “Could you provide a reference for our mortgage application?” It feels like a five-minute job pull together a few lines about their income, sign it off, move on. But those few lines carry more professional risk than most practitioners realise.
A single poorly worded sentence can create a duty of care to a lender you have never spoken to. An overly optimistic figure can trigger a negligence claim a year down the line. And a missing disclaimer or the wrong kind of disclaimer can leave your firm exposed in ways that professional indemnity insurers will be quick to point out.
Whether it is a bank seeking assurance that a borrower can service a mortgage, a letting agent needing comfort that a prospective tenant can afford the rent, or an insurer requiring a snapshot of a client’s financial standing, these requests arrive frequently, and the temptation is to treat them as administrative tasks to be dispatched quickly. But as both the ICAEW’s Technical Release 02/01AAF (Revised December 2019) and recent ACCA guidance make clear, the act of providing a reference carries real professional weight and real risk. The words chosen, the disclaimers included, and even the decision about whether to provide a reference at all can have significant consequences for clients, for third parties, and for the firm itself.
This article cuts through the complexity. Drawing on both ICAEW and ACCA frameworks, it sets out exactly what you can say, what you should not, and when the smartest thing to do is politely decline.
What Can Go Wrong When You Issue a Client Reference?
A carelessly worded reference can expose a firm on multiple fronts. It can create an implied contractual relationship with a lender the firm has never met. It can lead to claims of professional negligence from third parties who relied on those words to make financial decisions. And in the worst case, it can damage the firm’s reputation and trigger professional indemnity claims.
The courts have long maintained that professionals who hold themselves out as possessing a special skill can be held liable for negligence towards those to whom they owe a duty of care and that duty can extend to third parties. The landmark case of Caparo Industries plc v Dickman (1990), endorsed in Law Society v KPMG Peat Marwick (2000), established a three-fold test: the statement must be one that the defendant could reasonably foresee would be relied upon; there must be sufficient Professionals who hold themselves out as possessing a special skill can be held liable for negligence towards those to whom they owe a duty of care and that duty can extend to third parties. The landmark case of Caparo Industries plc v Dickman (1990), endorsed in Law Society v KPMG Peat Marwick (2000), established a three-fold test: the statement must be one that the defendant could reasonably foresee would be relied upon; there must be sufficient proximity between the parties; and it must be just and reasonable to impose such a duty. Every reference issued potentially meets these criteria.
Fundamental Limitations on What We Can Report
Future Income Is Inherently Uncertain
The ICAEW guidance is unambiguous: no amount of enquiry can give accountants the assurance needed to confirm that a client will have sufficient income to service a loan or any other obligation. Accountants are therefore unable to report in positive terms on future income or future solvency. The ACCA Rulebook reinforces this position if the validity of the information a client has provided cannot be confirmed, accountants are encouraged to decline to offer any view at all (paragraph 320.9 A1).
Present Solvency Is Equally Problematic
Reporting on a client’s current solvency is also fraught with difficulty unless the accountant is specifically engaged under full and proper terms to report on financial statements, computations, and projections as at a stated date. In most reference scenarios, the cost and time involved would be entirely disproportionate to the assurance being sought.
Audited Accounts and Going Concern
Even where audited financial statements exist, they do not provide certainty regarding going concern. As ISA (UK) 570 makes clear, the absence of a material uncertainty reference in an auditor’s report should not be interpreted as a guarantee that the entity will continue trading. Auditors owe their duty of care to the company’s members as a body, not to individual lenders or other third parties.
The Question of Truthfulness
At the heart of every reference lies a straightforward but crucial principle: what is said must be true. The depth and quality of a reference will depend directly on how long the firm has acted for the client and the quality of the accounting information available. If a reference is later challenged, the firm will need to demonstrate that every statement was grounded in fact and within the scope of its actual knowledge. Accountants should never embellish, speculate, or allow a client to pressure them into presenting an overly optimistic picture. If there is insufficient information, or if there is any doubt about the client’s ability to meet the proposed commitment, the right course is to decline the request.
The Type of Reference Covered
Both frameworks contemplate a specific, limited type of reference one appropriate only where no additional work, research, or investigation is required. The accountant draws on what is already known from the existing professional relationship, not conducting a fresh examination. Where a lender requires specific procedures, the matter moves into different territory: an agreed-upon procedures engagement under TECH 10/12 AAF, or, for higher assurance, a formal engagement under TECH 4/00 AAF involving the accountant, the borrower, and the lender.
What Can Be Legitimately Included
While the constraints are significant, there is useful information that can be provided particularly for individuals and small borrowers who lack publicly filed financial data. The reference can state how long the firm has acted for the client, giving the recipient a sense of the firm’s familiarity with their affairs. It can report the net income or profits declared to HMRC in the latest tax return, provided this is not already publicly available, taking care to define terms precisely (“gross income” versus “net income”). The accountant may also, where appropriate, include a statement that there is no reason to suppose the client would enter a commitment they did not expect to fulfil but this is a carefully bounded expression of professional experience, not a guarantee, and must acknowledge that the firm’s knowledge may not be fully up to date.
Defining the Purpose and Scope
Every reference should be tied to a specific purpose. A reference prepared in connection with a £10,000 monthly commitment is not suitable for a £100,000 commitment. To prevent misuse, it is good practice to include a clear statement restricting the reference to the private use of a named party, for a specified purpose, on condition that it must not be disclosed without the firm’s written consent.
The Delicate Question of Disclaimers
Disclaimers are standard but should not be regarded as a silver bullet. A critical distinction exists between a reference requested by the client for a third party, and one requested directly by the third party. In the first scenario, a “dual duty of care” may arise: the third party relies on the reference assuming the accountant has already satisfied the duty owed to the client, and a disclaimer excluding liability to the third party alone may be ineffective. Where a reference is given directly to a third party, no dual duty arises, and the standard practice of stating it is given in good faith but without financial responsibility is generally more effective.
The ICAEW reinforces the importance of disclaimers as one element of broader safeguards: no specific procedures should be carried out (and this should be stated); no additional fees should be charged (to avoid an implied contract); and the firm must disclaim, in writing, any liability for the information provided.
Confidentiality and What Happens If Things Go Wrong
The firm must always have the client’s express authority before sharing information and should copy the reference to the client. If legitimacy is later challenged, the ACCA Rulebook imposes a professional duty of confidence (Rule 114.1) but recognises that disclosure may be appropriate to protect an accountant’s professional interests in legal proceedings (paragraph 114.1 A1). The practical takeaway: always retain sufficient records of the information upon which a reference was based, so that professional judgement can be defended if later called into question.
References for Directors and Key Employees
Requests sometimes arrive for references relating to directors or key employees of a client company. In most cases, the company itself is better placed to comment. A firm should only provide such a reference where it has an established professional relationship with the individual and can speak to matters within its direct knowledge. The contents must be factual, and the firm should decline if asked to comment on areas outside its experience.
Dealing with Prescribed Forms
Lenders frequently provide standard forms that do not always reflect professional limitations. If a form invites open-ended or indefinite commentary, the wording must be amended or explanatory language added. Where a question is more appropriately answered by the client, the third party should be redirected. If there is uncertainty about whether even a modified version can be provided, the safest course is not to provide it.
Practical Checklist: Do’s and Don’ts
When to Escalate to a Formal Engagement
When a lender needs specific procedures or the assurance sought exceeds what can be offered from existing knowledge, the matter must move to a formal engagement. Under TECH 10/12 AAF, this means defined procedures and a clear scope. Under TECH 4/00 AAF, the engagement must set out the precise scope of work, the report to be produced, and a reasonable limitation of liability. The distinction matters because a formal engagement acknowledges and manages the duty of care, rather than leaving it ambiguous.
Conclusion
Providing client references is a valuable service, but one that demands care, precision, and a clear understanding of professional boundaries. The combined message from the ICAEW and ACCA is consistent: be truthful; be specific about purpose and scope; disclaim liability appropriately while understanding that disclaimers are not infallible; retain records; and never be afraid to decline when circumstances warrant it. When a reference is provided, it should be done with confidence that the firm can stand behind the information relied upon. And when it is felt that comment cannot be offered, practitioners should feel entirely comfortable declining politely. That is the exercise of sound professional judgement.
