Breaking finance and business news, tax information, jobs and more for finance directors and senior finance professionals.

The Financial Reporting Council (FRC) published guidance on the use of agreements between companies and their auditors to limit the auditor’s liability, as provided for under the Companies Act 2006.

Auditors have been able to agree limitation of their liability to the companies they audit since 6 April 2008, when the third phase of the Companies Act 2006 came into force.

Greater stability and certainty 

Hutton said that the guidance from the Financial Reporting Council would boost understanding of this new area of the law, and added that its potential contribution to greater stability and certainty in the business world was “very welcome and timely”.

He explained that it is for companies and shareholders to decide for themselves whether to make liability limitation agreements with their auditors, but said that this guidance would make that decision easier.

The guidance explains the processes companies should follow in making a liability limitation agreement with their auditors, as well as the factors to assess in deciding whether it is appropriate for them.

The guidance has been produced by a working group chaired by Sir Anthony Colman, previously a judge of the Commercial Court, and including representatives of companies, investors and the accountancy profession.

The guidance explains what is and is not allowed under the 2006 Act. It sets out some of the factors that will be relevant when assessing the case for an agreement and explains what matters should be covered in an agreement, and provides specimen clauses for inclusion in agreements.

Likely views of the shareholders 

It also explains the process to be followed for obtaining shareholder approval, and provides specimen wording for inclusion in resolutions and the notice of the general meeting.

In the introduction to the guidance, the FRC sets out its views on the use of auditor liability limitation agreements.

Introducing the guidance, Sir Anthony Colman said that the guidance was addressed to company directors, to help them assess whether to enter into an agreement with their auditor, and to help them implement the agreement if they decide to do so.

“One of the key considerations when making that assessment will be the likely views of the shareholders, as they must approve any agreement,” he noted.

Sir Christopher Hogg, chairman of the Financial Reporting Council, said that each company must make its own decision as to whether to enter into such an agreement with its auditors.

“The FRC believes that it would be desirable for companies to discuss with their leading shareholders, however, and with their advisers the merits of entering into an agreement in their particular circumstances,” he concluded. 

The FRC will review the impact and content of the guidance in the second half of 2010 to ensure that it incorporates developments in generally accepted practice and any other new developments.

Related articles

• KPMG fined over Independent audit
• Risk tops audit committee agendas
• FRC opinion on True and Fair concept
• KPMG chair calls for new audit kitemark
• Ten To-Do’s for Audit Committees in 2008

Related links 

• Financial Reporting Council
• Guidance on Auditor Liability Limitation Agreements