CONTROVERSY: accountancy milestone passes but new guidance yet to be published


Lawyers are urging auditors and their clients to begin a sensible dialogue on the charged issue of whether accountants should negotiate 'caps' on their liability for negligent audit work. There are suggestions that a 'two-tier' system could emerge, with small companies forced to agree fixed liability caps based on a monetary amount or face being unable to obtain an audit.



By contrast, large quoted companies backed by powerful institutional investors are already resisting fixed caps and seem willing only to consider agreements providing for proportionate liability.



Monday was a milestone in the history of the accountancy profession and in particular the Big Four - PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young. Following a lobbying campaign lasting years, accountants have won the right to limit their liability to clients for their audit work. Under the system of 'joint and several' liability which has applied hitherto, auditors can be sued for 100% of shareholder losses in cases of corporate meltdown, even if they were only partially responsible for those losses.



The reform was included in the Companies Act 2006 after the dramatic collapse of Enron earlier this decade destroyed Arthur Andersen, a former member of the Big Five. Almost all the UK's larger listed ?companies are audited by one of the Big Four and, were one of that quartet to collapse, the capital markets could face a governance crisis.



It remains unclear how the new system will operate. Final auditor liability guidance has yet to be published by a working group of the Financial Reporting Council, led by former commercial court judge Sir Anthony Colman.



Vanessa Knapp, a corporate partner at magic circle firm Freshfields Bruckhaus Deringer and a member of the working party, said: 'What is right for one company will not necessarily be right for another. A large quoted organisation will have shareholders who are members of the Association of British Insurers or National Association of Pension Funds. Those bodies have indicated they will only ?consider proportionate and not fixed monetary caps other than in ?exceptional circumstances.



'At the other end of the scale, a small private company might be able to agree a [monetary cap] to get lower fees or to find it easier to get someone to act.'



Asked how lawyers should advise their corporate clients in respect of liability caps, Nick Gibbon, corporate finance partner at City firm Beachcroft, said: 'The starting point has to be that it is difficult to see why any company could agree to limit the liability of their auditors, and why a board should recommend doing so to its shareholders. Corporate clients will no doubt be considering carefully whether agreeing a limitation will be accompanied by a benefit of some sort, such as a reduction in fees.'



Paul Rogerson