FRC publishes limited liability guidance

Liability guidance published

The long-awaited guidance for limited liability contracts has been released
today by the Financial Reporting Council.

The guidance, was produced by former commercial court Judge Sir Anthony
Colman, along with company and accountancy representatives.

Introducing the guidance, Sir Anthony Colman said: ‘The guidance is addressed
to company directors, to help them assess whether to enter into an agreement
with their auditor, and to help them implement the agreement if they decide to
do so. One of the key considerations when making that assessment will be the
likely views of the shareholders, as they must approve any agreement.’

The guidance

• explains what is and is not allowed under the 2006 Act;

• sets out some of the factors that will be relevant when assessing the case
for an agreement;

• explains what matters should be covered in an agreement, and provides
specimen clauses for inclusion in agreements; and

• explain the process to be followed for obtaining shareholder approval, and
provides specimen wording for inclusion in resolutions and the notice of the
general meeting.

However, it does not attempt to determine whether particular arrangements
will be considered ‘fair and reasonable’ as stipulated by the Companies Act,
since each arrangement will need to be assessed in the context of the particular
circumstances. That would ultimately be for the Courts to decide in the event of
a dispute.

FRC chairman Sir Christopher Hogg said that each company must make its own
decision as to whether to enter into such an agreement with its auditors.

‘However, the FRC believes that it would be desirable for companies to
discuss with their leading shareholders and with their advisers the merits of
entering into an agreement in their particular circumstances,’ said Sir

The FRC will review the impact and content of the guidance in the second half
of 2010 to ensure that it incorporates developments in generally accepted
practice and
any other new developments.

One example of how an agreement might be drafted includes:

‘This Agreement limits the amount of any liability owed to the Company by the
Auditor in respect of any negligence, default, [or] breach of duty [, or breach
of trust,] occurring in the course of the audit of the accounts for the
financial year [beginning/ending] [insert date] pursuant to [this Letter of
Engagement or the Letter of Engagement entered into on [date]] of which the
Auditor may be guilty in relation to the Company (‘the Auditor’s Liability’).

See the guidance

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