Government takes second look at auditor liability wording

Auditors may think they are getting a rough deal from the government as the
profession battles to halt the introduction of a criminal penalty for reckless
auditing, but some things are looking a little brighter.

While the government said that it would have another look at whether criminal
sanctions should be brought in using the words ‘knowingly or recklessly’, many
were convinced that its mind was already made up.

On the issue of liability limitation, however, and specifically the concerns
over whether the wording of the bill requires auditors to prescribe a monetary
limit to its liability when negotiating with clients, hopes are higher.

The end result may have been the same as with the criminal sanctions – the
government has agreed to review it. But the posture adopted was one of greater
sympathy, opening up the prospect of change.

During a Lords grand committee meeting, attorney general Lord Goldsmith said:
‘It is a perfectly respectable argument that the wording as it stands is not as
restrictive as people think it may be.

‘We did not intend the bill to limit liability to a fixed monetary amount by
way of limitation. We will take that away and look at the wording.’

The statement is likely to bring some cheer back to the profession. Some felt
the government’s intentions when addressing the issue of auditor responsibility
had been skewed by some poor drafting.

If this change of wording can be agreed, and it is a small one, it might open
the way for negotiations in other areas. Alternatively, it could provide the
government with the excuse to say the profession has got its way in one area,
but will have to deal with whatever else is thrown at it.

Liability cap timeline

March 2000: DTI steering group says auditors should be able
to negotiate a legal cap to liabilities

July 2004: Smith instructs Office of Fair Trading to
investigate the impact of a liability cap

Dec 2004: deal brokered with investors to allow
proportionate liability

March 2005: Draft company law reform bill proposes limited
liability