PracticeAccounting FirmsOne last test for audit liability cap

One last test for audit liability cap

Jacqui Smith did not have to travel far to deliver her speech to the ICAEW conference on Tuesday morning. But in crossing Victoria Street from the DTI to Westminster's QEII centre, she changed the relationship between companies and auditors irrevocably.

Link: Audit cap special report

The DTI minister signalled that persistent lobbying had persuaded ministers that a cap on auditor liability was the best way to guard against a Big Four becoming a Big Three.

She didn’t say so explicitly. What she actually said was that the DTI would continue to work towards a resolution via an Office of Fair Trading review of potential competition issues.

Nevertheless insiders said ministers had indeed been persuaded of the need for a cap and now, at last, had a clear timetable for reform in mind.

As Accountancy Age went to press on Tuesday night, the OFT was preparing the ground for the review. On Wednesday, DTI minister Lord Sainsbury was due to speak on the companies bill in the Lords during the legislation’s report stage.

Next, ministers want the OFT to finish its review by the end of the month.

That would enable them to table an amendment to the companies bill in September, which would repeal section 310 of the existing Companies Act and remove the bar on contractual limitation of auditor liability.

The DTI has taken its time. Despite furious lobbying in the wake of Andersen’s collapse amid fears that another corporate scandal could persuade some firms to exit the audit market, ministers indicated last autumn they were unwilling to do anything this side of the companies bill becoming law.

Whitehall watchers believe that responses to the bill, most of which favoured reform, helped persuade ministers to act. A more detailed review of policy options in the last three weeks, and a steady hardening of its resolve, persuaded the DTI that Smith’s address to the ICAEW should be used to signal its intent.

Many questions remain unanswered. How will investors, suspicious that a cap would encourage firms to treat audit as even more of a loss leader, be appeased? Can firms deliver the transparency that will be expected in return for increased protection?

And crucially, how will a cap be defined? Will it be a statutory limit set by the secretary of state, or one negotiated between auditor and client?

Or, more likely, will the Financial Reporting Council play a role in developing guidance for auditors and clients?

Smith insists the status quo remains an option. But few seriously expect it. The DTI hopes reform will not just prevent further erosion, but that it will re-ignite competition between firms.

SMITH’S BRIEF FOR THE OFT

‘We need to be clear how any potential change (for example allowing shareholders to decide on the maximum liability of the auditors) would impact on competition in the audit market. With that in mind we have asked for the OFT’s advice on “whether reform to the law on auditor liability to permit liability to be limited by means of a negotiated cap would significantly affect competition in the GB audit market, and, if so, how”.’

REACTION TO THE SPEECH

We need to do something to ensure that the number of large audit firms doesn’t diminish further. I am in favour of some limitation of their liability – JOHN COOMBE, GSK CFO

It looks like they are prepared to allow auditors to limit liability and the fact that Jacqui Smith committed to this timescale means that it looks like it is on for the companies bill. It is very encouraging – PETER WYMAN, PWC PARTNER

In our view, capping the auditor’s liability will not do much, if anything, to guarantee quality. On the contrary it risks creating a moral hazard – MARY FRANCIS, ABI

I really think this is a step in the right direction. Industry looks to accountancy to train its people – JOHN ORMEROD, FORMER SENIOR PARTNER, ANDERSEN

It will place an element of certainty when firms face up to major liability suits. It will be a positive move for the profession and make it more attractive for new people – JOHN WOSNER, PKF CHAIRMAN.

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