PracticeAccounting FirmsShareholders powerless on liability

Shareholders powerless on liability

Auditors likely to demand proportionate liability in their contracts

Company shareholders face little choice but to allow auditors to limit their liability or be left without an auditor, despite being offered powers of veto in a new government bill.

As part of the company law reform white paper, introduced by trade secretary Patricia Hewitt in parliament last week, auditors will be able to negotiate proportionate liability by contract with their clients subject to shareholder approval.

But concerns remain that once the laws are in place, auditors will refuse to take on clients without such a clause in the terms of engagement. This would force shareholders to accept proportionate liability or be left stranded without an auditor.

Neil Lerner, head of regulation at KPMG, said: ‘Our policy, having campaigned for this, will be to negotiate for proportionality in our new contracts.’ He added that the firm’s reaction should shareholders disapprove would be ‘part of the whole risk management process’.

Peter Wyman, head of professional affairs at PricewaterhouseCoopers, said that while his firm had yet to decide its policy, some accounting firms might want the clause.

Others expect that proportionate liability will become standard. ‘If a client comes back and says it is not prepared to sign a contract with a proportionate liability clause, the auditor has to decide whether to take the risk or the company has to find another auditor willing to do so,’ said Tony Bromell, head of accountancy markets at the ICAEW. ‘It may be the case that for all auditors the risk will be too great.’

Clive Edrupt, of the CBI’s company affairs group, hoped the predictions would not become a reality, but it was unlikely such a state would be allowed to occur. ‘They wouldn’t be able to get away with it,’ he said.

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