Reforms could protect auditors

The widely-held belief that rich auditing firms will pay up when threatened with a lawsuit has been resisted persistently and fervently by the firms, particularly over the past 30 years, during which time litigation has escalated.

But new legislation, proposed in the company law review, could strengthen the determination of auditors and their firms to stamp out the growing trend.

Auditors across the Big Five firms, which have faced numerous high-profile and expensive court cases over the past decade, welcomed the news.

Gerry Acher, chairman of the ICAEW audit faculty, said: ‘It’s always easy to take a side-swipe at auditors. To single out auditors is to take the easy option. But it ignores the real issue.’

The biggest change to auditors’ duties in the review, if it is enacted, will be the wholly new requirement for auditors to check an operating and financial review to be produced by all listed companies according to company law proposals.

The OFR will cover qualitative aspects of business, including ‘future plans, opportunities, risks and business strategies’.

But it is proposals to limit auditors’ liability that will radically change the face of professional negligence claims. However, the changes will not come from an increase in auditors’ duties, but rather the clarification of directors’ duties.

The new requirement, said Roger Davis, a senior partner at PricewaterhouseCoopers and ICAEW representative on the review’s consultative committee, ‘seems to me to be a sensible formalisation of best practice’.

Company law proposals, published on 26 July, are being interpreted as a coup for auditors who have claimed for more than three decades that the issue of negligence cannot be solved until directors face up to their responsibility.

The group did, however, reject the ‘proportionality’ solution, which would have capped auditors’ liability absolutely at the share attributable to them of the blame for events.

Moves to define directors’ duties came as no surprise. The Institute of Directors broadly welcomed them. Lord Newton, head of the IoD’s professional standards department, said: ‘While there is much detail which we will need to examine with care, we welcome the basic thrust.’

If the proposals become law, directors will be obliged to hand over voluntarily information they consider would aid an auditor’s work. Roger Davis added: ‘Auditors will pay for their mistakes but not those of others. I would like to see if whatever is finally agreed is to come as close to proportionality liability.’

Davis rejects any supposition that the new legislation will cause a drop in the quality of auditors’ work. ‘There will still be great sanctions in practice, claims, reputational damage and a blight on the careers of individuals,’ he said.


Liability needs a complete rethink

The Company Law Review

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