Auditors struggle to agree liability limits with clients

If a company collapses, it is probably happy for their auditor to go down
with them, new research suggests.

A survey of 100 accountancy firms of varying sizes, including the Big Four
firms, has found that only 17% had managed to agree a contract with a client to
limit their liability for damages in the event of the company collapsing.

Big accounting firms are worried that they 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 all losses when a company collapses,
even if it is judged to be only partly to blame. In the UK, under the Companies
Act, company directors can limit the liability of their auditor, with the
agreement of shareholders, although, so far, no big companies are thought to
have done so.

Research from Beale and Company Solicitors provides the first evidence that
audit firms are struggling to agree Limitation of Liability Agreements with
clients.

Use of LLAs is more prevalent among the larger firms, the survey says. The
survey does not disclose whether firms managed to sign any of the agreements
with FTSE 100 clients.

On a more positive note for audit firms, none of the firms that had signed an
LLA with a client said their client had asked for a cut in fees in return.

A quarter of firms who had agreed an LLA said they had not told their
insurers. Half of firms with LLAs said they based the agreements on wording
prepared by the Financial Reporting Council.

Ed Anderson, partner at Beale and Company, says: ‘Although LLA’s are in their
infancy still, it is surprising that a higher proportion of firms are not using
them.

‘There is clearly considerable resistance to them among some audit clients,
but the fact that companies are not apparently using them to drive down fees is
excellent news for the profession.’

Representatives from the Big Four firms recently met officials from the
Department for Business Enterprise and Regulatory Reform to discuss their
concerns over liability for damages.

In March, US markets watchdog the SEC said it would block any limited
liability deals for companies that were also registered in the US.

One possible compromise favoured by leading firms would be to limit auditor’s
liability in law to the proportion of their client’s loss which they are
responsible for.

Under this proposal, shareholders would have the power to overturn the
auditor’s limited liability at a vote at an annual general meeting.

Fresh calls for more protection for auditors were made last week in response
to proposals from MPs on the Treasury select committee that auditors take on
more responsibility in relation to banks.

The committee wanted to see auditors speak more regularly to banking
regulators about what they find while going through the financial reports of
banks.

Oliver Tant, KPMG’s UK head of audit, told Accountancy Age last week
that any increase in auditor’s responsibility would ‘inevitably’ make firms more
vulnerable to litigation.