FRC chief sees no "rapid change" to auditor liability rules

Baroness Hogg

The head of the UK’s reporting regulator does not foresee “rapid” change to
auditor liability rules, despite industry calls for reform.

Baroness Hogg, chairman of the Financial Reporting Council (FRC) described
the liability dilemma as “not an easy one to solve” and believes there will be
no immediate change in the area.

“What happened last time the debate went through suggests this isn’t an easy
one to solve,” she told Accountancy Age.

“I understand the argument but I don’t see rapid change there.”

There’s been little movement on the auditor liability issue since 2006 when
the government introduced new laws permitting limited-liability agreements
between auditors and their clients. The industry had argued it was exposed to
unlimited liability which could, in a worst case scenario, bring down an entire
firm following a major single litigation.

However, no major company has ever entered into an agreement, according to
senior auditors, which has led to the widely held view the laws failed.

The issue has leaped back on the agenda since the crisis, with senior
auditors offering to provide more expansive opinions on once off-limit areas
like business models, risks and forward predictions in exchange for liability
reform.

In April, PwC UK’s chairman and senior partner Ian Powell said any discussion
of audit reform had to occur along side liability reform.

“We can have any debate, certainly on respect of an audit practice, where we
don’t talk a little bit about the liability risk and the restriction of
liability on the audit practices,” he said.

In April, Graham Clayworth, audit partner at BDO, said the profession would
be willing to provide assurance around “front-of-the-book” narrative disclosures
if there was reform to liability.

“The concession that the profession will have to make for additional
liability limits will be to extend work that the auditor does at the front of
the book,” he said at the time.

However, Lady Hogg’s comments will likely dampen spirits in an industry that
is hopeful audit reform would be coupled with liability reform. It also raises
the prospect of auditors left exposed to greater litigation without any
legislative protection.