Hostilities resume with investors

This time the venue will be the House of Lords and the battleground, the
company law reform bill – in particular, a series of amendments to clause 486 on
auditor duties.

The measures, according to Labour’s Lord McKenzie, ‘would limit the duties of
auditors so that they would have to report on problems to the extent that they
prevented the accounts being properly prepared’.

Innocuous, you might think – but the institutional investors clearly do not.
They have reacted with horror, claiming this is a ‘stealth move’ to dramatically
reduce the care of duty of auditors. Along with the granting of proportionate
liability and removing the jail terms for ‘knowingly or recklessly’ giving an
incorrect opinion, the investors believe things have gone a little too far.

Clearly some care has to be taken here. Investors, must not be allowed to
offload all the risk onto the shoulders of auditors. Conversely, auditors cannot
escape responsibility. Most of all, audit quality cannot be undermined.

But a look at the wording brings another issue to mind. Investors in the UK
are adamant that the approach to accounting and especially auditing remain
‘principles based’, especially given their ongoing concerns over what they see
as rules-based international auditing standards. Yet they could be falling into
the trap of pushing for more clearly defined rules.

The trick the government has to pull off is ensuring that the auditors are
not tied up in red tape, while still providing the assurance that their
principal clients, the shareholders, demand. This one could run and run.

Related reading