PracticeAuditLiability cap: Jacqui Smith’s speech

Liability cap: Jacqui Smith's speech

Read an extract from Jacqui Smith's speech to delegates at today's ICAEW annual conference, setting out her reasons for asking the Office of Fair Trading to examine the impact of introducing a cap on audit liability in the UK.

‘That strong relationship between UK government, the professions and the FRC ‘family’ of regulators helped us to work through the difficult issues thrown up by Enron.ÿIt is also helping us to work towards a practical resolution on auditor liability.

We had a very strong response to our consultation document on auditor and director liability – though no clear consensus on the way forward emerged as a result.

However let me reassure you today that we continue to work towards a resolution. I understand completely that you are keen to hear what we now plan to do. It is important that we reach the right decision. Let me update you on where we are.

On director liability, the consultation document sought views on a range of options, including implementation of the Company Law Review recommendations, reform along the lines of the US model, or a statutory business judgment rule.ÿ There is, I think, general agreement about what our aims should be:

  • we want to ensure that a high quality, and diverse pool of people continue to come forward to serve as directors. Incredibly important for business success.
  • we want entrepreneurial directors who are prepared to take informed and rational risks;
  • but, just as importantly, we also want companies to be able to hold negligent directors to account.ÿ

As expected, we received a range of views, many vigorously expressed.ÿWe recognise the importance of this issue for business – that is why we are determined to provide the right answer, rather than a quick answer.ÿWe are considering the responses very carefully, and will bring forward proposals in due course.

On auditor liability equally strong views have been expressed. But above all, we keep in mind our key objectives.

  • We need high quality, independent audits.
  • All parties requiring an audit must be able to obtain one.ÿÿ
  • We want to maintain an open, transparent and competitive market for audit services.ÿ

These objectives are widely shared.

We need to be clear how any potential change would impact on competition in the audit market.ÿ

With that in mind we have asked for the OFT’s advice on “whether reform to the law on auditor liability to permit liability to be limited by means of a negotiated cap would significantly affect competition in the GB audit market, and, if so, how”.

I hasten to add that the OFT are looking at material that is already available – so no need for any further submissions!ÿ

We are considering all the options, and the implications that arise from each option. And that includes the option of doing nothing too.ÿSo work continues and we have reached a significant stage in the process. And I would like to thank those present, and from all sides of the debate, for working with us and providing information as we work towards a resolution.ÿ

Importantly, our partnership with you is ensuring again, as in the past, that we do not resort to knee-jerk reactions to events and issues, but come to the right, measured response, in partnership with you.ÿ

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