Auditors struggle to agree liability limits with clients

If a company collapses, it is probably happy for their auditor to go down with them, new research suggests.

A survey of 100 accountancy firms of varying sizes, including the Big Four firms, has found that only 17% had managed to agree a contract with a client to limit their liability for damages in the event of the company collapsing.

Big accounting firms are worried that they will face a wave of litigation from investors and liquidators who are trying to recover losses from big company failures.

Currently, an auditor can be sued for all losses when a company collapses, even if it is judged to be only partly to blame. In the UK, under the Companies Act, company directors can limit the liability of their auditor, with the agreement of shareholders, although, so far, no big companies are thought to have done so.

Research from Beale and Company Solicitors provides the first evidence that audit firms are struggling to agree Limitation of Liability Agreements with clients.

Use of LLAs is more prevalent among the larger firms, the survey says. The survey does not disclose whether firms managed to sign any of the agreements with FTSE 100 clients.

On a more positive note for audit firms, none of the firms that had signed an LLA with a client said their client had asked for a cut in fees in return.

A quarter of firms who had agreed an LLA said they had not told their insurers. Half of firms with LLAs said they based the agreements on wording prepared by the Financial Reporting Council.

Ed Anderson, partner at Beale and Company, says: ‘Although LLA’s are in their infancy still, it is surprising that a higher proportion of firms are not using them.

‘There is clearly considerable resistance to them among some audit clients, but the fact that companies are not apparently using them to drive down fees is excellent news for the profession.’

Representatives from the Big Four firms recently met officials from the Department for Business Enterprise and Regulatory Reform to discuss their concerns over liability for damages.

In March, US markets watchdog the SEC said it would block any limited liability deals for companies that were also registered in the US.

One possible compromise favoured by leading firms would be to limit auditor’s liability in law to the proportion of their client’s loss which they are responsible for.

Under this proposal, shareholders would have the power to overturn the auditor’s limited liability at a vote at an annual general meeting.

Fresh calls for more protection for auditors were made last week in response to proposals from MPs on the Treasury select committee that auditors take on more responsibility in relation to banks.

The committee wanted to see auditors speak more regularly to banking regulators about what they find while going through the financial reports of banks.

Oliver Tant, KPMG’s UK head of audit, told Accountancy Age last week that any increase in auditor’s responsibility would ‘inevitably’ make firms more vulnerable to litigation.