The National Association of Pension Funds has backed criticisms of the liability caps being proposed by the audit industry.

The Association of British Insurers this week publicly said it would 'red-top' any company that arranged a fixed fee cap with an auditor, as the debate on the moves shifted heavily towards 'proportionality'. A red top amounts to a serious governance warning from the ABI.

The moves may be a blow for firms, as most to prefer proportional liability, but have not ruled out the prospect of arranging fixed caps.

The NAPF spokesman said: 'We are not in favour of capped liability. We are in favour of one form of limited liability, which is proportional liability. We will need a party to be liable for their portion of any loss. And that is a quid-pro-quo for improved audit quality.'

The ABI and the NAPF's members together control more than £2,000bn worth of investment funds. Despite the setting-up of a working party by the Financial Reporting Council to look at how the new liability regime would work, it would appear that key stakeholders are hoping to decide the debate for themselves.

ABI director-general Stephen Haddrill said this week: 'Government has proposed that the limit on auditors' liability should be proportionate to their responsibility. We agree with that.

'The companies bill didn't enact the limit in these terms and some are still talking of a fixed financial cap on a liability. We can't support that and we will red-top any company that agrees such a cap with their auditor.'

Tory Treasury spokeswoman and audit committee chair Baroness Noakes told Accountancy Age that 'caps are not popular', while former Tomkins finance director Ken Lever agreed that 'proportionate liability is a more attractive way forward.'

Agreements will have to be in place for when the provisions on liability in the Companies Act come into effect on 6 April.

Representatives from the profession claimed this week they would reserve their position until the FRC issued its guidance. PwC partner, Peter Wyman said: 'We are awaiting the outcome of the FRC's working party and we confidently expect that will point the way forward.'

A KPMG spokesman said the firm was waiting for the results of the FRC review.