PracticeAuditInvestors fear liability cap by the back door

Investors fear liability cap by the back door

Investors fear proposed legislation could let in liability cap through back door

Concern is growing among investors and legal experts over clauses in draft
legislation that could allow auditors to set a liability cap, rather than agree
proportionate liability.

Lawyers and investors have highlighted a lack of clarity in the companies law
reform bill, which they claim fails to define proportionality and actually
encourages companies to set an amount to which the auditor would be liable.

‘The wording doesn’t refer to proportionality as such,’ said John Trotter,
head of the professional negligence team at law firm Lovells. ‘It sounds more
like a financial cap that is being contemplated here.’

Trotter added that this seems to be the case as one of the terms which
shareholders have to approve in any such agreement is ‘the amount to which the
auditor’s liability is limited’.

Iain Richards, head of governance at Morley Fund Management, called the
liability clause ‘open ended’ and the drafting ‘vague and unclear’.

Richards also said the proposals on allowing shareholders to ask questions of
auditors at AGMs were a ‘white elephant’ and of ‘no use whatsoever’.

Investors called on the Financial Reporting Council to take a lead on the
matter but chief executive Paul Boyle said that the issue of a cap was a
‘political’ one which the body would not get involved in.

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