UK's DTI Will Not Legislate Over Auditor Liability

by Robin Pilgrim, LawAndTax-News.com, London

10 September 2004

The UK's long-winded Company Law Review took another step sideways this week when Trade Secretary Patricia Hewitt evaded the issue of auditor liability by refusing to amend the Companies Bill currently before Parliament to establish a statutory basis for financial liability.

In a written statement, Hewitt said: "I have decided not to bring forward amendments to the current Bill to extend an auditor’s duty of care."

There has been intense lobbying by varying interests within the UK's accountancy profession to persuade the government either to impose a 'cap' on auditor liability or to provide for what is known as 'proportionate liability'.

The Company Law Review has been going on nearly since Labour came into power eight years ago, and most of its recommendations have been batted forward into a proposed major bill which is to be launched after the next election.

The current bill, which deals with just a few of the easier points, is called the Companies (Audit, Investigations and Community Enterprise) Bill and received its Third Reading in the House of Lords on the 14 July. It was introduced into the Commons on 15 July.

In its current form, the Bill:

• strengthens the system of regulating auditors by imposing independent auditing standards, monitoring and disciplinary procedures on the professional accountancy bodies; enabling the Secretary of State to delegate to the Financial Reporting Council (FRC) her powers to recognise the professional bodies; and securing the FRC's funding through a grant and a levy power;
• strengthens the enforcement of accounting and reporting requirements by extending the remit of the Financial Reporting Review Panel so that it can look at interim as well as annual accounts and reports; giving it a power to require information from companies it is investigating; and opening a gateway for the Inland Revenue to pass information on defective accounts to the FRRP; extending the Secretary of State's power to require more detailed disclosure of non-audit services provided by auditors to companies; giving additional powers to auditors to obtain information from companies; and requiring directors to state that they have not withheld relevant information from their auditors;
• strengthens the company investigations regime by requiring any person to provide relevant information to company investigators; giving investigators the right to require entry and remain on premises of a company under investigation; and providing protection from breach of confidence claims for people who voluntarily provide information in certain circumstances.

The second part of the Bill provides for community interest companies.

The measures to improve confidence in companies and markets are mostly recommendations from post-Enron reviews including the Co-ordinating Group on Audit and Accounting Issues chaired by Melanie Johnson and Ruth Kelly. They are the final part of the package, supporting other action already taken such as reform of the regulatory structure for the accountancy profession and changes to the Combined Code to strengthen the role of non-executive directors and audit committees.

Hewitt said that in the light of the recent Office of Fair Trading conclusion that introducing a liability cap would not significantly enhance competition, "I have concluded against proposing changes to the law on this." However, the Secretary said that the government remained committed to improving the operation of the audit market and will continue to consider any proposals, including the possibility of limiting liability on a proportionate basis by contract.

The accountancy bodies were quick to express their disappointment that the government has backed away from limiting auditor liability.

The government has however agreed to some of the proposals put during consultation, and said that when the bill is tabled at the Commons Committee stage, several amendments will be put forward:

• Companies will be allowed, but not required to indemnify directors for legal costs and penalties arising from proceedings brought by third parties. However, the amendments will not allow legal costs and fines arising from criminal proceedings and regulatory penalties to be covered by any indemnity.
• Companies will be permitted to pay directors’ defence costs as they are incurred, even if the action is brought by the company itself. The director would still be liable to pay any damages awarded to the company and would have to repay defence costs to the company if the defence were unsuccessful (except where the company chooses to indemnify the director in respect of his legal costs in civil proceedings brought by third parties).

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