FRC’s auditor liability guidance is ‘balanced and sensible’

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draft
guidance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The FRC’s draft guidance, written by a working group led by former Commercial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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