PracticeAccounting FirmsMinisters to offer limited liability olive branch

Ministers to offer limited liability olive branch

The UK government could be willing to accept some form of proportionate liability for auditors instead of a flat-rate cap, Accountancy Age has learned.

Link: The Caparo ruling

The Department of Trade and Industry has refused to officially rule anything in or out on auditor and director liability. But it is understood that suggestions from investors to enshrine in legislation critical court rulings that limit auditor responsibility have gone down well within government circles.

The main thrust of the argument is that the House of Lords’ decision on the Caparo case should be written into the companies bill. It ruled that auditors ‘do not, in general, have a duty of care to individual shareholders or potential shareholders in a company whose accounts they audited’. Also suggested is that other rulings, such as those in the Bannerman case, be included in law.

This would legally place restrictions on whom the auditor is accountable to, removing the need for a cap, investors argue.

But such an outcome would only be satisfactory to investors if there were safeguards that the duty of care to investors was enshrined in auditing practice.

‘If you look at case law, it almost always applies proportionate liability anyway – but case law doesn’t keep insurers happy as it can change,’ said one investor.

‘Caparo restricted the duty of care for auditors, but the profession didn’t have the confidence to follow on from the ruling.’

The investor added that, if you put a cap in law, it could create expectations that auditors were there to be sued, when at the moment it is quite difficult to take an auditor to court.

>CAPARO RULING The plaintiff in Caparo Industries vs Dickman (1990) argued the auditor of a company owed a duty of care to someone buying, selling or retaining shares on the reliance of a negligently made audit report. However, the Lords ruled that the central purpose of the audit report was to enable shareholders to exercise their proprietary powers by giving them reliable intelligence on the company’s affairs, sufficient to allow the shareholders to scrutinise the management’s conduct and exercise their collective powers to control the management through general meeting.

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