PracticeAuditFirms initiate tentative liability cap negotiations

Firms initiate tentative liability cap negotiations

Informal arrangements being made to ensure arrangements are in place before the caps comes into effect in October 2008

Firms have begun liability cap negotiations with their clients – in some
cases amounting to about ten times the audit fee.

The moves come on the back of legislation introduced last year that comes
into effect in October 2008. The informal arrangements are being made to ensure
arrangements are in place before the caps come in.

Firms may either choose to cap liability as a multiple of audit fees – with
suggestions of between five and ten times the audit fee being mooted – or on the
basis of ‘proportionate’ liability.

A Big Four source familiar with current negotiations said: ‘My understanding
is that the firms have begun putting these into their engagement letters.’

A ten-times multiple would see the largest audit liabilities capped at £500m
for 2006.

E&Y’s liability for BP would have been capped at £550m under such an
arrangement; KPMG’s at HSBC at around £400m; PricewaterhouseCooper’s at Royal
Dutch/Shell at £520m; and Deloitte’s at WPP at £125m. The four companies pay the
largest audit fees, according to our sister title Financial Director.

Such moves are thought to be tentative, with other senior figures claiming
they are not yet taking place.

The FRC is set to produce guidance on the issue, but the moves are at an
early stage. FRC chief executive Paul Boyle said: ‘We’re looking to identify an
independent chairman to lead this work. We’ve taken soundings from a few people,
but its still a bit of a hot potato. We haven’t been overwhelmed by offers.’

Lovells partner Nicholas Heaton said he was not surprised that firms and
companies had begun negotiations given the timeframe.

‘If you want to put a cap in place, you need to have a dialogue with the
audit client. And shareholders have to approve the cap,’ he said.

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