Currently the law prevents both auditors and directors from having their liability curtailed.
The DTI document sets out five possible responses to the question of auditor liability in relation to work carried out for clients. These are:
- allowing audit firms to limit their liability with a client, subject only to the general law on contracts;
- allowing audit firms to limit their liability, with a cap set at a multiple of the audit fee;
- allowing audit firms to limit their liability, with a cap set at a multiple of total fees paid to the auditor – including any non-audit services provided;
- allowing audit firms to limit their liability, set as a multiple of the auditor’s turnover; and
- allowing audit firms to limit their liability at a fixed rate (for example, one rate for the Big Four firms and lower rates for the next tier of firms etc.)
On the question of liability of company directors, the DTI said the options were to maintain the status quo; to implement the Company Law Review recommendations, which include allowing a company to pay a director’s legal costs upfront; or allowing companies to limit the liability of directors against claims for negligence.
Any reform of the law would not provide protection from criminal acts of fraud though.
The Big Four fear one or more of them could be destroyed – in a similar fashion to Andersen – from a multi-billion pound lawsuit and will be lobbying for a liability cap. Mid-tier firms will be more vulnerable to legal claims if such an option is favoured.
DTI secretary Patricia Hewitt said: ‘We do not want regulations that are so stringent, complex or unclear that honest, capable people are put off being directors or auditors.
‘Equally the law must be firm and robust to deal fairly with cases where something has gone wrong – as a result of either negligence or dishonesty.’
Responses to the consultation are requested by 12 March 2004.
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