PracticeAuditInvestor revolt puts spanner in works of liability reform

Investor revolt puts spanner in works of liability reform

As politicians continue their vigorous debate over the various pros and cons of auditor liability clauses in the company law reform bill, another obstacle to firms negotiating proportionality has arisen.

The bill, at Grand Committee stage in the House of Lords, will allow auditors
to limit their liability to clients when negotiating contracts. Although there
is concern over whether that limitation is proportional or constitutes a
monetary cap, both would require the approval of company shareholders.

But now one of the major corporate governance activist groups has come out in
opposition to the potential law change, and is encouraging shareholders to stand
firm against audit contract alterations.

In its 2006 shareholder voting guidelines, Pension Investment Research
Consultants pre-empted the passing of the liability clause into law by advising
shareholders that they should vote against any contract that would permit audit
liability limitations.

The body argued that there is no merit in shareholders approving such deals
and said that is was ‘inappropriate for auditors to be indemnified by the
company, or that the company has the right to purchase liability insurance from
them as such relationships may affect independent judgement’.

This stance could lead to something of a stand off between auditors and their
clients, should shareholders take on board PIRC’s position.

But even if company owners do wish to deny auditors the ability to limit
liability, their attempts could still be hamstrung.

Once the legislation is passed, it would be highly unlikely that a firm,
especially among the Big Four, would be prepared to take on an audit without a
limitation agreement in place.

Peter Wyman, head of professional affairs at PricewaterhouseCoopers, said he
was ‘not surprised’ by the stance taken by PIRC, and that while the introduction
of proportionality may be ragged, firms would likely be ‘very concerned’ about
taking on an audit without such an agreement once it had become broadly
accepted.

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