Overview: this job’s a liability

Former commercial court judge Sir Anthony Colman is an accomplished legal
mind. His experience in the commercial court saw him preside over cases ranging
from the extractive industries, company ownership and merger disputes, to
international banking and credit disputes, commercial fraud and US law.

He authored a landmark judgment in the case of Cable &Wireless v IBM UK,
which altered the way in which civil disputes are handled.

An expert in and advocate of alternative dispute resolutions, in particular,
he is set to turn his huge legal experience to bear on what could be one of the
thornier legal issues to hit the
Financial Reporting Council
recently.

What’s happened

Sir Anthony is chairing a working group to give guidance to the profession on
how to reasonably construct its auditor liability agreements. The appointment,
by the FRC, came after calls in the profession for the regulator to provide more
clarity on the liability provisions within the Companies Act 2006, which will
allow auditors to negotiate with companies that they are auditing.

The issues concerned are: what would a cap look like, does the legislation
allow it, and how will proportionality, if allowed, work? The conclusions will
affect the risks associated with auditing for many years to come.

FRC chief executive Paul Boyle had taken a few soundings from the profession
and admitted that, frankly, nobody was too keen on the job.

What’s going to happen

Sir Anthony’s working group of nine – and two observers – is composed of
members of the profession, company representatives and investors. The group will
have to come up with reasonable guidance, which will be open to consultation
later this year.

It is expected that, given the deadlines – the auditor liability provisions
start in October 2008 – the group will have no opportunity for delay but instead
must be swift and decisive. Investors, after all, have to vote on caps by the
next AGM season.

Boyle’s comments about the dubious popularity of the post suggest that many
think there’s not much to gain in leading the review, and perhaps a lot to lose,
making it a decidedly awkward brief for Sir Anthony.

He will have to use those resolution skills to the full.