Will the US say yes?

Under pressure: SEC chairman Christopher Cox

Urgent talks are set to open within days in a bid to persuade the US
financial watchdog to finally endorse deals in the UK intended to limit
auditors’ liability to their clients.

The Securities and Exchange
Commission has been reluctant to back the new arrangement because it
considers it a breach of auditor independence, but the UK watchdog will argue
that guidance it published this week will ensure that the contracts do not
compromise the strict rules.

Paul Boyle, chief executive of the
Financial Reporting
Council, confirmed the talks would begin but would not discuss how he would
address the SEC’s concerns.

Limited liability arrangements for auditors have huge ramifications for the
SEC because accepting them would mean a major concession for auditors serving UK
companies listed in the US, while there is no similar regime currently in place
for US auditors and companies.

UK observers believe an SEC rejection of limited liability deals would
effectively end UK government efforts to limit auditor’s liability.

PricewaterhouseCoopers
head of professional affairs Peter Wyman warned that a failure to win SEC
approval could bring government policy for limiting auditors’ liability in the
UK to a ‘shuddering halt’.

‘I would find it very unlikely that roughly half the FTSE100, who are not SEC
registrants, would agree to any liability limitation if the other half ­ who are
subject to SEC rules ­ could not enter into limited liability arrangements,’ he
said.

‘And if the FTSE100 doesn’t, then I doubt that many, if any, below the
FTSE100 would do so.’
But he was optimistic that armed with the new guidance, the FRC could bring the
SEC round.

‘The contract requires the prior approval of shareholders, requires full
disclosure and is subject to court override,’ Wyman added.

‘Therefore the reality is that this is a contract, not between directors and
auditors ­ which may well be an independence issue ­ but between shareholders
and auditors, which is not,’ said Wyman.

Despite publishing the new guidance the FRC advised UK companies with
listings abroad to consider the laws and regulations of other countries that
could affect their ability to enter into a liability limit-ation agreement.

‘In the case of the US, the FRC is in discussion with the SEC about the
impact of its rules on UK SEC registrants, and will publish advice on this issue
as soon as possible,’ the FRC said.

Herbert Smith partner Hardeep Nahal said that the UK government took the view
that companies should be empowered to enter limited liability arrangements. ‘It
would not be in the spirit of comity between nations for that to be prevented by
another country’s rules,’ he said.

The SEC refused to comment.