Auditors Seeks Limitation of Liability

It is when times get tough that problems which might have been easy to gloss over in better times start to make themselves visible. When serious problems that have remained undiscovered for a substantial period come to light, a company’s auditors may well find themselves facing a writ.

The sections of the Companies Act 2006 which allow auditors to limit their liability in relation to audit work, with the agreement of their audit client, are now in force and the Financial Reporting Council (FRC) has issued guidance on the use of such agreements.

Any agreement setting a limit on the liability of a company’s auditors must be approved by the company’s shareholders. An agreement cannot cover more than one financial period and will only be effective insofar as it is ‘fair and reasonable’. In practice, whether or not the limit on liability is fair and reasonable, will be determined by the courts, depending on the particular circumstances of each case.

Many company directors can expect to receive a letter from their auditors, enclosing a liability limitation agreement, before their next financial year end. 

Company directors should consider carefully the implications of agreeing to limit the liability of their auditors, especially if they regard their auditors as an essential part of their system for reducing the risk of fraud.

If your auditors propose a liability limitation agreement of any kind, take professional advice on your individual circumstances.