PracticeConsultingReforms could protect auditors

Reforms could protect auditors

The trend to go straight for auditors' 'deep pockets' in cases of alleged professional negligence could be stymied if proposed changes to company law are enacted.

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.

Links

Liability needs a complete rethink

The Company Law Review

Related Articles

5 tips for SMEs to protect cash flow

Accounting Software 5 tips for SMEs to protect cash flow

5m Alia Shoaib, Reporter
Tyrie on Finance Bill 2017: ‘Making Tax Policy Better’

Consulting Tyrie on Finance Bill 2017: ‘Making Tax Policy Better’

11m Stephanie Wix, Writer
Managing partner Q&A - the year ahead: Richard Toone, CVR Global

Accounting Firms Managing partner Q&A - the year ahead: Richard Toone, CVR Global

12m Kevin Reed, Writer
Deloitte 'self-imposes exile' on government contracts to defuse PM row

Accounting Firms Deloitte 'self-imposes exile' on government contracts to defuse PM row

12m Kevin Reed, Writer
Managing partner Q&A - the year ahead: Julie Adams, Menzies

Accounting Firms Managing partner Q&A - the year ahead: Julie Adams, Menzies

12m Kevin Reed, Writer
Friday Afternoon Live: Deloitte's tech thing; PAC wants HMRC 'contingencies'; and Sports Direct

Business Regulation Friday Afternoon Live: Deloitte's tech thing; PAC wants HMRC 'contingencies'; and Sports Direct

1y Kevin Reed, Writer
Friday Afternoon Live: HMRC complaints rise; Deloitte scoops big audits; and corporate reporting woes

Audit Friday Afternoon Live: HMRC complaints rise; Deloitte scoops big audits; and corporate reporting woes

1y Kevin Reed, Writer
New head of equity capital markets for KPMG

Accounting Firms New head of equity capital markets for KPMG

1y Stephanie Wix, Writer