Hopes build for end of ‘reckless’ audit law

Accountants’ are pinning their hopes on a last ditch intervention by the
Treasury to drop ‘reckless audit report’ clauses from the company law reform
bill that created a new criminal offence.

Insiders have drawn a parallel between the reckless audit issue and the way
the chancellor dealt with the operating and financial review last year.

In the meantime lawyers, on behalf of the Big Four, are poring over the
latest statements on the company law reform bill in a bid to decipher whether
the government has watered down its definition for the new criminal offence of
‘knowingly or recklessly’ producing a misleading audit opinion.

The argument has hinged on how the word ‘recklessly’ is understood, but at a
Commons committee meeting last week constitutional affairs minister Vera Baird
said that ‘a person who is merely negligent will not be guilty of this offence,
even if the negligence is gross’.

To allay concerns among Tories and Liberal Democrats who have so far opposed
the proposed language, Baird added: ‘The test of recklessness will catch only
auditors who consciously do not care about doing a good job. To prove that an
auditor has behaved recklessly, it is necessary to show that the auditor was
aware that an action or a failure to act carried risks and that… it cannot be
done by inadvertence or carelessness.’

PricewaterhouseCoopers and other Big Four firms have enlisted some of the
country’s most senior lawyers to interpret the latest declaration by Baird in a
bid to gauge whether her explanation is a step down from Lord Sainsbury’s
initial explanation in the Lords.

The firm will hand over its findings to Tory MP and accountant Justine
Greening who was at the committee meeting. She has the option in the autumn to
raise the issue again if she receives legal advice that conflicts with how Baird
defines the proposed law.

At the meeting proposals on auditors’ ability to negotiate limited liability
agreements were passed over swiftly with little discussion. What debate there
was focused on the clause on agreement terms.

Greening demanded tougher parliamentary scrutiny of any changes in
regulations: ‘We should ensure the House has ample opportunity to debate any
changes,’ she said.

Related reading