DTI Urged To Amend Wording Of Company Law Reform Bill

by Robin Pilgrim, LawAndTax-News.com, London

27 June 2005

Financial advisory and accounting firm, Grant Thornton has called on the Department of Trade and Industry (DTI) to revisit its proposed wording for the Company Law Reform bill, as set out in its White Paper, arguing that as it currently stands, the legislation does not serve the best interests of company shareholders.

According to Grant Thornton, the proposal to enforce 'knowingly or recklessly issuing a wrong audit report' as a criminal offence could backfire, as such a measure will weaken the audit profession and thus result in information of a poorer standard for shareholders.

Steve Maslin, head of assurance services at Grant Thornton, explained that:

"We have very serious reservations on the wording of the draft clauses. We believe that the overriding principle behind criminal offences should be dishonest intent and that law should be clear in that regard."

Maslin went on to argue that in the current litigious climate, where even the largest auditor is capable of bearing only a tiny fraction of potential liability of the largest companies, it is unhelpful for the courts to decide on what represents "recklessly issuing an incorrect audit report".

"The concern is with the word 'recklessly'. If left unchecked we could have criminal sanctions being levied against firms or partners merely because they made a mistake or where they made a judgement in good faith that with the benefit of hindsight proved to be wrong. We have seen that even the threat of criminal proceedings could cause a major audit firm to fail or to be irreparably damaged," he continued.

The assurance services chief went on to suggest that there are other consequences of a criminal action being brought against an auditor, as there is often a significant delay between the auditor being charged and the trial. In the intervening period the auditor's career or the audit firm's reputation will be likely to have been destroyed or at least seriously damaged. Therefore the auditor's career may be ended or an audit firm may fail, even if at subsequent trial the auditor were found to be not guilty.

However, he revealed that Grant Thornton welcomes the proposals to implement a system of unlimited proportionate liability, explaining that the firm has always been in favour of proportionate liability, where each party is responsible for the consequences of its own actions but not those of others.

"A system of unlimited proportionate liability protects auditors from the consequences of other people's actions, while leaving auditors fully liable for their own mistakes. We believe that this is a fair and equitable solution that best serves the public interest," he observed.

Maslin concluded:

"We urge the DTI to revise the wording before the draft bill is prepared. Introducing 'knowingly or recklessly issuing a wrong audit report' as a criminal offence could be devastating for the audit profession. What's more, it will have the unfortunate knock-on effect of making the profession unattractive for both recruiting and retaining talented individuals. It may have the unintended consequence of leading to increased concentration in the market for audit services and audit quality will suffer in the long run as a result. It is in the public interest and of shareholders specifically that the reform proposals are revised."

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