FRC's auditor liability guidance is 'balanced and sensible'

by Penny Sukhraj

18 Dec 2007

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Auditors and companies who are set to enter into limited liability agreements negotiations in the New Year have been given 'sensible and balanced' guidance.

Partner at Barlow Lyde & Gilbert, Simon Konsta, said the Financial Reporting Council's draft guidance accommodated the concerns of both the financial community and the auditing profession.

The FRC's draft guidance, written by a working group led by former Commercial Court judge Sir Anthony Colman, set out clear examples of how to achieve the requirements of the Companies Act, which allows for limited liability arrangements between auditors and their clients as of April 2008.

The FRC has opened consultation on their draft, which closes in March next year.

The working group discussed issues such as the timing relating to the periods that the agreements cover, the test for what constitutes 'fair and reasonable' limit, as well as the necessity of having shareholders approve the agreements.

'As the reform process demonstrated, achieving that balance is not always absolutely straightforward,' said Konsta.

'I think it is highly constructive in the sense that it is volunteering specimen wording – which is going to be very helpful to practitioners and directors wondering how to implement the requirements.

'It is also highly sensible of working group to have identified issues that might bear upon what constitutes a fair and reasonable limit, without seeking to prescribe in a quantified or qualitative way what is fair and reasonable. That plainly will be determined by negotiations that the markets accept, and ultimately the courts as and when they come to review and test one of these provisions.'

However, there will be considerable time before any limited liability agreements are tested.

'By definition the limited liability agreements will only be in respect of prospective audits, and then you would need a loss and litigation ensuing from that. I think its absolutely right that the group didn't try to be too prescriptive,' he said.

The group also directed senior management to have regard to the views of institutional shareholders and governance bodies when entering into their agreements.

'I think that is reflective of the need perhaps to avoid unnecessary clashes,' said Konsta.

'If you look at this from the director's perspective, this is novel and new terrain for them. The working group has drawn their attention to their legal and other responsibilities. I think that plainly the working group has been cognisant of resistance of some members of the governance bodies and larger institutional investors to potential forms of liability agreements, and they're directing directors to have regard to that.'

The FRC hopes to issue final guidance by the first half of 2008.

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