Frustration mounts over wait for auditor liability guidance

Hardeep Nahal, Herbert Smith

Vague: Herbert Smith partner Hardeep Nahal unimpressed by guidance

But even when this guidance is released ­ and it is unlikely to come out this
year ­ the greater concern for auditors is that companies still seem unconvinced
that they should limit liability at all, whether there is a framework in place
or not.

The Financial Reporting Council, the body responsible for guidance on the
Companies Act provisions for auditor liability, has already received submissions
from the Confederation of British Industry expressing uncertainty over the idea
of auditor liability.

‘The final guidance should seek to give more assistance to boards on why they
may consider it is in the company’s interests to recommend a limitation of
liability arrangement,’ the CBI’s submission on the first draft of the FRC’s
guidance stated.

A separate industry source echoed this view: ‘They failed to positively make
a case as to why companies should accept limited liability arrangements. It’s
seen by some as an attempt to push through a menu of choices without clear
understanding and careful thought about why companies should accept this.’

These responses will not be well received by auditors. The expectation that
all companies would accept liability contracts as a fait accompli once a
framework was in place has not been met.

One way to change this view could be to focus on tightening up the guidance
in future drafts.

Herbert Smith partner Hardeep Nahal, said the draft guidance was ‘quite
vague’ and ‘left a lot of questions unanswered’.

‘The key issue is on what basis directors of companies can say that entering
into a limited liability contract is in the best interest of the company. One
argument I’ve heard is that in return, companies might get lower audit fees ­
but that’s not a good argument because firms are not putting this out to get
lower fees,’ Nahal said.

The other contention is that directors should somehow consider the interest
of the wider business community, due to concerns over the impact of one of the
Big Four going under. ‘But that’s a pretty tenuous argument, asking people to
take a wider view,’ said Nahal.

The profession’s battle to convince the markets to opt for limited liability
contracts are far from over.

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