Government under pressure to resurrect limited liability deals

Lord Mandelson

Business secretary Lord Mandelson is to come under renewed pressure to limit auditors’ liability by statute as the economic situation deteriorates and the risk of a major audit firm exiting the market increases.

Last week US regulators indicated to the UK government that they would not accept agreements between an auditor and clients registered in the US that limit liabilities on a proportionate basis.

The news delivered a blow to hopes for a liability cap but key figures in the profession have now switched their attention to lobbying for statutory change permitting caps. It is understood that the government official likely to face the call will be Geoff Dart, a director overseeing governance and corporate law at the department for business.

‘It’s a major disappointment that the SEC has taken this stance. It’s important that there’s a proper reaction from the UK authorities on this matter because otherwise we are getting to a stalemate at precisely the time where the pressure on auditors is growing,’ said Martyn Jones, national audit technical partner at Deloitte.

It is understood the SEC’s main objection is the potential abuse of auditor independence due to an overly cosy relationship between auditors and company directors.

Peter Wyman, head of professional affairs at PricewaterhouseCoopers, said: ‘The reality is that this is an agreement between auditors and shareholders. There’s no independence impairment.’

The Companies Act 2006 removed a previous legal bar to limited liability agreements (LLAs) to allow auditors to agree proportionate liability with clients on a contract basis. With the SEC decision disallowing LLAs with around half of the FTSE-100 because they are listed in the US, the uneven playing field will make it difficult for auditors to reduce their exposure with other listed clients.

Campaigners believe the position would change if proportionality is written into law. The department for trade, although it has opportunities over the next six months to legislate on the issue, said it ‘has no plans to legislate further’.

‘We need this done and we need it done quickly. If there was a need before the credit crunch then we need it now more than ever. I don’t think it’s a big shift in policy. You can get the same end but by law,’ said Wyman.