Government refuses to put a cap on auditors' liability

Published on Wednesday 8 September 2004 01:56

THE government yesterday refused to cap auditors’ liability in the event of them being involved in any future Enron-style negligence case, but did propose limited protection against ruinous litigation.

Patricia Hewitt, the Trade and Industry Secretary, said she would insert safeguards for directors into the Companies Bill, currently before Parliament, that would allow a company to indemnify directors in advance against the costs of defending themselves in legal proceedings alleging negligence.

However, if the negligence case was lost, the directors would have to repay the company.

Although the announcement disappointed the big four accounting firms, it came as no surprise.

Hewitt had said she would only consider a cap if it would encourage competition. However, a report into auditors’ liabilities by the Office of Fair Trading last month found that any cap would only have a neutral effect on competition.

The big four - PWC, Ernst & Young, Deloittes and KPMG -- have been lobbying hard for a cap on liability through some form of agreed proportional liability.

They argued it would ensure they would not be reduced to three or less by catastrophic litigation, and that it would encourage smaller firms to compete for audits of large listed companies.

The accountancy body, the Association of Chartered Certified Accountants, last night gave a qualified backing to the announcement. Roger Adams, executive director, said: "We welcome the DTI’s apparent willingness to consider more imaginative solutions.

"We would still prefer the government to bring in proportionate liability by overhauling the outdated laws of joint and several liability. But the announcement is still a step forward."