Investors wary of liability plan

Peter Wyman, PwC: compromis solution

A proposal by leading accounting firms for a new law to limit auditors’ liability for company failures will face opposition from leading investors and shareholder advisers.

Representatives from the Big Four firms met officials from the Department for Business Enterprise and Regulatory Reform last week amid concern that auditors 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 unlimited losses when a company collapses, even if they were judged to be only partly to blame. Company directors can limit an auditor’s liability, with the agreement of shareholders, although no big companies are thought to have done so.

Michael McKersie, assistant director, capital markets, at the Association of British Insurers, whose members control about 15% of the UK stockmarket, said it was sympathetic to the principle of reform of liability for auditors.

But he questioned whether ‘hard wiring’ proportionate liability into UK law was a wise move, citing uncertainty over how courts would interpret the rule when deciding the damages auditors.

‘Auditors do have a legitimate concern that they are the deep pockets in the current situation,’ McKersie said.

‘Proportionate liability is less detrimental to shareholders than previous [suggestions] such as monetary caps on liability, however, we have not yet considered the implications of proportionate liability being compulsory.’

Other options for auditor liability include holding the auditor liable to no more than two times the total damages that would be directly attributable to the auditor, McKersie added.

A spokesman for Pirc, the UK body which advises UK shareholders on corporate governance issues, said it opposed making auditor liability statutory.

Peter Wyman, head of public policy at PricewaterhouseCoopers, has said one compromise solution, which might satisfy US regulators, would be to limit auditor’s liability in law to the proportion of their client’s loss which they are responsible for.

The SEC last week declined to comment on the Big Four proposal.