BP has begun discussions with its auditor Ernst & Young over a possible liability cap, the company revealed this week. Tomkins, the engineering group, is also discussing the issue with its auditor Deloitte, it said.

The confirmations emerged despite denials from Big Four sources that any negotiations were underway on the moves, which are to come in to effect as part of the Companies Act passed last year. Sources close to BP’s auditor E&Y stressed that it had had ‘discussions’ but not ‘negotiations’ .

BP declined to give details when questioned over when liability cap discussions began or when shareholders could expect options to vote on, but a BP spokesman said: ‘We have started discussions with our auditors.’

Tomkins FD Ken Lever said: ‘Any discussions will take place as part of the planning process for the 2007 audit, currently underway.’ The discussions will be of critical interest to investors, who could see any liability actions they bring limited by a cap.

But sources have said that the idea of a liability cap is so vague at present that there will be little concrete decisions to be made at this stage. Some have talked of capping liabilities as a multiple of the audit fee, while others have talked of a ‘proportionality’ idea.

E&Y has until now strongly suggested that moves to negotiate liability were a long way off, but BP’s statement suggested more activity is underway than first thought.

E&Y said in a statement: ‘We will not comment on individual clients. However, we talk to our audit

clients on an ongoing basis about the nature and range of changes in Company Law. The idea of capping auditor liability was well flagged

in the Companies Act and many of our clients are interested in hearing our preliminary views onthe subject and vice-versa for obvious reasons.

‘However, we are certainly not at a point to begin negotiations with any client on auditor liability caps and nor do we expect to be until the FRC guidance is issued.’

The FRC has not yet issued any guidance on liability caps, though a statement is expected next week.

Deloitte was unable to comment as Accountancy Age went to press.