Auditors demand cap be ruled out

Accountants have backed the investment community over its worries on the
wording of legislation allowing auditors to limit their liability.

Following the publication of clauses relating to auditors in the company law
reform bill earlier this summer, investors were outraged to discover that, in
its current form, the bill seemed to allow auditors to set monetary limits to
which they were liable when negotiating contracts with clients.

All the discussions prior to its release had centred around the concept of
proportionate liability by contract, where auditors would be liable in
proportion to their responsibility for any failures.

‘Limitation agreements should not be able to specify a maximum amount to
which an auditor would be liable – to do so would be contrary to the principle
behind proportionate liability,’ said ACCA in its submission to the Department
of Trade and Industry.

ICAEW chief executive Eric Anstee also acknowledged that some may feel the
draft clauses ‘do not make it clear that liability limitation should be pursued
by reference to proportionality’ and suggested a revision.

Others were less concerned over the impact of the wording. Peter Wyman, head
of professional affairs at PricewaterhouseCoopers, said that, even if the
legislation remained as it was, and could be interpreted as allowing a monetary
cap, ‘auditors would not ask for it and shareholders would not approve it’.

Investors had opposed the introduction of proportionate liability before its
inclusion in the bill, after parts of the community raised concerns over the
potentially damaging effects on audit quality of European directives and
international accounting and auditing standards.

However, this position may soften somewhat, if changes to the drafting are
made to remove the possibility of a cap, and the bill is used as an opportunity
to reinforce the concept of the ‘true and fair view’ audit as a cornerstone of
financial reporting in the UK.

The Investment Managers Association said the draft changed the reporting
requirement to state the accounts gave a ‘true and fair view, in accordance with
the relevant financial reporting framework’. The addition of the second half of
this phrase, it claims ‘is changing the form of the audit opinion on the
accounts into a statement of compliance with that framework’.

Talks have already taken place with the DTI on this subject, and the signs
for investors look good. ‘I was encouraged to hear minister Alun Michael affirm
the government’s intent not to throw the baby out with the bathwater, and
maintain the overarching requirement for accounts to give a true and fair view
of the health of a company,’ said Tim Bush of Hermes.

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